a

GAO

United States Government Accountability Office

Report to the Subcommittee on Oversight 

and Investigations, Committee on 

Financial Services, House of 

Representatives

October 2005 OCC PREEMPTION 

RULEMAKING

Opportunities Existed 

to Enhance the 

Consultative Efforts 

and Better Document 

the Rulemaking 

Process

GAO-06-8
www.gao.gov/cgi-bin/getrpt?GAO-06-8.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard J. 

Hillman at (202) 512-8678 or 

hillmanr@gao.gov. 

Highlights of GAO-06-8, a report to the 

Subcommittee on Oversight and 

Investigations, Committee on Financial 

Services, House of Representatives 

October 2005

OCC PREEMPTION RULEMAKING

Opportunities Existed to Enhance the 

Consultative Efforts and Better Document 

the Rulemaking Process 

Federal preemption of state law affecting national banks always has been 

controversial and seems to have become more so with consolidation in the 

financial services industry, which has resulted in the presence of large 

national banks in nearly every state. OCC followed the statutory framework 

for rulemaking and appears to have followed applicable executive orders, 

but it was difficult to fully determine the basis for some agency actions or 

assess the extent of its consultation with stakeholders because OCC did not 

always document its actions. The agency also lacked its own guidance or 

procedures for its rulemaking process and instead used a rulemaking 

checklist as a guide for completing reviews and routing documents. Federal 

internal control standards call for documenting actions to verify that an 

agency has complied with its policies and applicable law. The standards also 

call for agencies to follow written procedures in making important decisions,

to provide a framework for ensuring compliance with management 

directives and applicable law and regulations. Without such documentation 

and procedures, evidence to substantiate OCC’s actions was limited. 

OCC considered all of the approximately 2,700 comment letters it received 

on its banking activities proposal, but strongly disagreed with comments 

questioning its preemptive authority and the rules’ adverse effect on 

consumers. GAO’s analysis of the letters revealed that commenters were 

concerned that the rule could diminish enforcement of state consumer 

protection laws, questioned the bases for OCC’s legal analysis and 

conclusions, and posited adverse effects on state-chartered banks. In 

response, OCC contended that it has a comprehensive consumer protection 

effort for national banks, reiterated its preemptive authority, and asserted 

the rule would preserve the “dual banking” system. However, OCC agreed 

with some issues raised in the public comments and made some changes to 

the final rules. For instance, OCC included an explicit reference to a 

provision of the Federal Trade Commission Act that prohibits national banks 

from engaging in practices considered unfair and deceptive. 

Most criticism about how OCC promulgated the rules focused on what some 

believed was a lack of opportunity to discuss and comment on the proposed 

rules. Although OCC briefed several congressional members about the 

proposals before they were published, some criticized OCC for issuing the 

rules while Congress was in recess and not allowing time for hearings on the 

rules. OCC officials told GAO that a lengthy delay would have harmed banks’ 

ability to securitize their loans, left consumers with fewer choices, or 

imposed burdensome costs on banks seeking to comply with a multitude of 

state laws. According to consumer groups, OCC could and should have 

offered additional mechanisms for soliciting public input—such as public 

meetings. Some financial institution regulators have used other means 

besides the comment period to solicit input for rulemakings they deemed 

controversial. GAO observed that such efforts, while not required, might 

have contributed to a better understanding about the rules. 

On January 13, 2004, the Office of 

the Comptroller of the Currency 

(OCC) issued two sets of rules (the 

preemption rules) on the extent to 

which the National Bank Act 

preempts the application of state 

and local laws to national banks 

and their operating subsidiaries. 

The rules and the manner in which 

OCC promulgated them generated 

considerable controversy. Some 

state officials, consumer groups, 

and congressional members 

questioned whether OCC adhered 

to the statutes and executive 

orders pertaining to rulemaking 

and whether the process was as 

inclusive as it could have been. 

GAO (1) assessed OCC’s 

rulemaking process within the 

framework of applicable laws and 

executive orders, (2) described the 

issues raised in comment letters 

and OCC’s responses, and (3) 

identified and discussed 

stakeholder concerns about how 

OCC promulgated its preemption 

rules. 

GAO is not making 

recommendations because OCC 

generally followed laws and 

executive orders. GAO makes 

observations on how OCC could 

enhance consultation and better 

document its rulemaking process. 

In its comments, OCC agreed to 

develop detailed written 

procedures, disagreed with GAO’s 

observations about the sufficiency 

of documentation and consultation 

relative to the executive orders, but 

intends to enhance its consultation. 
Page i GAO-06-8 OCC Preemption Rulemaking

Contents

Letter 1

Results in Brief 5

Background 8

OCC Generally Followed Rulemaking Requirements but Lacked 

Documentation and Written Guidance, Making It Hard to Verify 

Consultation Efforts 14

OCC Considered All Comments on Its Banking Activities Rule, and 

Strongly Disagreed with Those Challenging Its Authority, but 

Made Some Changes in Response to Others 29

Stakeholders Raised Issues Regarding the Process OCC Used to 

Promulgate Its Preemption Rules 40

Observations 44

Agency Comments and Our Evaluation 46

Appendixes

Appendix I: Objectives, Scope, and Methodology 48

Appendix II: Comments from the Office of the Comptroller of the 

Currency 52

Appendix III: GAO Contact and Staff Acknowledgments 55

Figures Figure 1: OCC Informal Rulemaking Procedures 22

Figure 2: Sample OCC Rulemaking Checklist 24

Figure 3: Composition of Commenters, Based on Our Analysis of 

373 Nonform Letters 31

Figure 4: Frequently Cited Concerns of Selected Commenters 

Opposed to OCC’s Banking Activities Proposal 33
Contents

Page ii GAO-06-8 OCC Preemption Rulemaking

Abbreviations

APA Administrative Procedure Act

CRA Congressional Review Act

CSBS Conference of State Bank Supervisors

FDIC Federal Deposit Insurance Corporation

Federal Reserve Board of Governors of the Federal Reserve System

LRA Legislative and Regulatory Activities Division 

NCUA National Credit Union Administration

OCC Office of the Comptroller of the Currency

OMB Office of Management and Budget

OTS Office of Thrift Supervision 

RFA Regulatory Flexibility Act

SEC Securities and Exchange Commission 

UMRA Unfunded Mandates Reform Act

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Page 1 GAO-06-8 OCC Preemption Rulemaking

United States Government Accountability Office

Washington, D.C. 20548

A

October 17, 2005 Letr

The Honorable Sue W. Kelly

Chairwoman 

The Honorable Luis V. Gutierrez

Ranking Minority Member

Subcommittee on Oversight and Investigations

Committee on Financial Services

House of Representatives

In the National Bank Act, Congress created the Office of the Comptroller of 

the Currency (OCC) to supervise national banks.1

 In its capacity as the 

supervisor of national banks, OCC issues regulations, policies, and 

interpretations to establish standards, define acceptable practices, provide 

guidance on risks, and prohibit or restrict practices. However, OCC 

traditionally has issued opinions, rather than rules or regulations, on 

whether the National Bank Act preempts state laws that impose standards 

or restrictions on the business of national banks. In contrast, on January 

13, 2004, OCC issued two final rules (preemption rules) on the extent to 

which the National Bank Act preempts the application of state and local 

laws to national banks and their operating subsidiaries.2

 The rules and the 

manner in which OCC promulgated them generated considerable 

controversy and debate, including questions about OCC’s authority to issue 

the rules.

According to OCC, the two sets of rules “codified” judicial decisions and 

OCC opinions on preemption under the National Bank Act by making them 

generally applicable and clarified certain issues. More specifically, as stated 

by OCC, the visitorial powers rule clarifies that federal law commits the 

supervision of national banks’ banking activities exclusively to OCC 

(except where federal law provides otherwise) and that states may not use 

1

In the 1830s, state banks became the primary source of paper currency, issuing notes 

against their reserves. Congress enacted the National Currency Act in 1863, which limited 

the power of state banks to issue notes, established a national bank charter, and created 

OCC, among other things. OCC is a bureau of the U.S. Department of the Treasury. 12 Stat. 

665 (1863). In 1864, Congress revised the National Currency Act (renamed the National 

Bank Act) to provide for comprehensive OCC regulation of national banks. Although OCC is 

a bureau of the Treasury, it is an independent office within Treasury. In 1994, Congress 

amended the National Bank Act to describe OCC’s autonomy with respect to rulemaking. 

Pub. L. No. 103-325 § 331(b). 

2

69 Fed. Reg. 1895 (visitorial powers); 69 Fed. Reg. 1904 (national bank activities).
Page 2 GAO-06-8 OCC Preemption Rulemaking

judicial actions as an indirect means of regulating those activities.3 The 

second rule, which we refer to in this report as the banking activities rule, 

preempts categories of state laws that relate to bank activities and 

operations, describes the test for preemption that OCC will apply to state 

laws that do not fall within the identified categories, and lists certain types 

of state laws that are not preempted.4

 In proposing the banking activities 

rule, OCC stated that it needed to provide timely and more comprehensive 

standards about the applicability of state laws to lending, deposit taking, 

and other authorized activities of national banks because of the number 

and significance of questions banks were posing about preemption in those 

areas.5

The proposed rules and OCC’s rulemaking process drew strong reactions of 

either support or opposition from the banking industry, state legislators, 

attorneys general, and other officials, consumer group representatives, and 

some Members of Congress. For example, all of the state attorneys general 

questioned whether OCC reasonably analyzed the case for preemption. In a 

comment letter on the banking activities proposals, they stated that the 

National Bank Act was not intended to divest all state authority over 

national banks, and under Supreme Court precedent, national banks are 

subject to state laws that do not conflict with the powers of national banks 

or discriminate against national banks. Further, opponents such as 

consumer groups and state legislators feared that the preemption of state 

law, particularly with respect to predatory lending practices, would weaken 

consumer protections. In contrast, proponents contended that replacing 

differing state laws with a consistent standard would increase the health of 

the banking system. However, opponents countered that OCC’s actions 

could have far-reaching effects on the banking industry, such as 

undermining the “dual banking system,” by conferring undue benefits to 

federally chartered banks at the expense of state-chartered banks.6

3

12 C.F.R. § 7.4000 (2005).

4

12 C.F.R. §§ 7.4007, 7.4008, 7.4009, 34.3, 34.4 (2005). These regulations also contain an 

anti-predatory lending standard and discuss OCC enforcement of section 5 of the Federal 

Trade Commission Act for consumer protection purposes. 

5

68 Fed. Reg. 46119, 46120 (Aug. 5, 2003).

6

The complex system of federally and state-chartered banks is generally referred to as the 

“dual banking system.”
Page 3 GAO-06-8 OCC Preemption Rulemaking

Finally, Members of Congress held three hearings in 2004, including one 

held by your subcommittee in January of that year, centered on these and 

other issues. In addition to airing differences on the limits of federal versus 

state powers and potential effects on consumers, the hearings also featured 

discussion about such issues as why OCC issued the rules when Congress 

was in recess (after receiving a request from some members to delay the 

issuance of the rules), to what extent OCC consulted with state officials 

and other groups during the rulemaking process, and the resources OCC 

dedicates to consumer complaints. 

The statutory framework applicable to OCC rulemaking includes the 

Administrative Procedure Act (APA), which, among other things, sets forth 

the process for federal agency “informal rulemaking”; the Congressional 

Review Act (CRA), which provides for Congress’s review of an agency’s 

rules and even disapproval (through a joint resolution); the Regulatory 

Flexibility Act (RFA), which requires agencies to assess the economic 

impact of their proposed rules on “small entities”;7

 and the Unfunded 

Mandates Reform Act (UMRA), which generally requires covered agencies 

to take certain actions if their proposed rules could result in the 

expenditure of $100 million or more in any year by state, local, and tribal 

governments, or by the private sector. In addition, OCC is subject to 

executive orders in its rulemakings. Executive Order 12866, Regulatory 

Planning and Review (E.O. 12866) directs agencies, among other matters, 

to determine if their proposed rules constitute a “significant regulatory 

action” as that phrase is defined in the order, and, if so, to prepare certain 

analyses and provide them to the Office of Management and Budget 

(OMB), which is charged with reviewing agencies’ proposed rules under 

the order. A second order, Executive Order 13132, entitled “Federalism” 

(E.O. 13132), sets forth principles, policymaking criteria, and requirements 

for agencies to apply when developing “policies that have federalism 

implications.” Federalism in this context means the division of government 

responsibilities between the federal government and the states. The APA, 

other laws, and the two executive orders give agencies discretion about 

how to promulgate regulations. 

You requested that we review the process OCC followed in promulgating 

the preemption rules; assess the potential impact of the rules on the dual 

banking system and consumer protection; and assess OCC’s process and 

7

“Small entities” includes small businesses, small governmental jurisdictions, and certain 

not-for-profit organizations. 5 U.S.C. § 601-612.
Page 4 GAO-06-8 OCC Preemption Rulemaking

capacity to handle consumer complaints. As agreed with your staffs, we 

will provide you with separate reports on the potential impact of these 

rules on the dual banking system and OCC’s capacity to handle consumer 

complaints at a later date. This report focuses on OCC’s rulemaking 

process. Accordingly, the report (1) assesses OCC’s rulemaking process 

within the framework of applicable laws and executive orders; (2) 

describes the issues raised in public comment letters on the banking 

activities rule, and describes if and how OCC responded to these 

comments; and (3) identifies issues that stakeholders raised about the 

manner in which OCC promulgated its preemption rules and how OCC 

responded to the stakeholders. 

To assess OCC’s rulemaking process, we reviewed applicable laws and 

executive orders related to OCC rulemaking and analyzed the Federal 

Register notices pertaining to both the proposed and final preemption 

rules. In addition, we interviewed OCC officials who participated in OCC’s 

promulgation of the rules and analyzed the documents from docket files 

that OCC maintained on the two rules. Using this information, we 

compared OCC’s actions with the provisions of the relevant laws and 

executive orders. To determine the issues raised in the comment letters on 

the substance of the banking activities rule, we conducted a content 

analysis of 373 letters received by the OCC on its preemption proposal. To 

describe how OCC responded to the issues raised in the comment letters, 

we analyzed the final rule for any changes OCC attributed to the comments 

and the preamble of the final rule for discussion regarding the public 

comments. To clarify our understanding of how OCC considered or 

addressed certain comments, we interviewed OCC officials. To identify 

issues raised about how OCC promulgated its preemption rules, we 

interviewed officials from consumer groups and state organizations to 

obtain their views and reviewed statements and transcripts from 

congressional hearings and letters that members sent to OCC during the 

public comment period. To identify how OCC responded to the criticisms 

of its rulemaking process, we interviewed OCC officials and reviewed their 

congressional testimony. In addition, we interviewed officials from the 

Board of Governors of the Federal Reserve System and the Federal Deposit 

Insurance Corporation (FDIC) to obtain information on how those 

organizations handle controversial rules. We conducted our work in 

Washington, D.C., from August 2004 through August 2005 in accordance 

with generally accepted government auditing standards. Appendix I 

provides a detailed description of our scope and methodology. 
Page 5 GAO-06-8 OCC Preemption Rulemaking

Results in Brief OCC followed the statutory framework for rulemaking and appears to have 

acted within its discretion in executing the executive orders, but we could 

not fully determine the basis for some of the other agency actions or assess 

the extent of its consultations with stakeholders, because OCC did not 

always document its actions and lacked written guidance and procedures 

detailing the rulemaking process. OCC followed the process for informal 

rulemaking set forth in the APA by allowing for public participation 

through the “notice and comment process.” That is, OCC published both 

the visitorial powers and banking activities proposals in the Federal 

Register, requested and considered public comments, and promulgated the 

final rules as prescribed by the APA. OCC also followed requirements and 

documented some actions it took related to the other statutes. However, 

with regard to the two executive orders, OCC did not always document its 

actions and some stakeholders disputed some of OCC’s decisions or 

actions related to both orders. For example, in the preamble to the banking 

activities rule, OCC stated that the rule was not “significant” for purposes 

of E.O. 12866. Staff memorandums, in the official rulemaking file, which we 

reviewed, did not articulate the analysis underlying the determination. OCC 

officials told us that because the rules were clarifying matters related to the 

powers of national banks that had been addressed previously by OCC and 

in court decisions, they did not deem the rules to be significant regulatory 

actions as defined in the order. In relation to provisions of E.O. 13132 that 

direct agencies to consult with state and local officials early in the process 

of rulemaking when preemption of state law is involved, some state bank 

supervisors, attorneys general, and their representative organizations 

maintain that OCC’s efforts to consult with them were not sufficient. OCC 

disagreed with those views. Its official rulemaking file contained little to 

document its consultation efforts. Further, OCC does not have written 

guidance, policies, or procedures detailing the rulemaking process. Instead, 

OCC uses a “rulemaking checklist” that serves as a guide for completing the 

required reviews and the routing of documents. According to internal 

control standards for the federal government, agencies should follow 

written procedures in making important decisions. Without such 

documentation, it may not be clear—to agency management, auditors, or 

oversight committees—that an agency followed applicable requirements. 

While OCC considered the comments it received in response to its banking 

activities proposal, it disagreed with challenges to its preemptive authority. 

However, OCC did make changes in the final rule in response to some 

commenter concerns. OCC considered all of the approximately 2,700 

comment letters submitted by a variety of consumer groups, public 
Page 6 GAO-06-8 OCC Preemption Rulemaking

officials, businesspeople, and others in response to its banking activities 

proposal. Our analysis of the 373 nonform comment letters revealed that 

commenters focused on what they believed would be the rule’s diminishing 

effect on enforcement of state consumer protection laws, questions about 

OCC’s legal analysis and conclusions justifying preemption and the rule’s 

effect on the dual banking system. Consumer groups commented that 

because national banks and their subsidiaries would no longer be subject 

to state consumer protection laws, some of which have “higher standards” 

than federal law, consumers would be vulnerable to predatory lending. 

Some consumer groups and state officials with whom we met continue to 

believe that there is a “vacuum” in consumer protection under the rule. 

Opposing comments also disputed OCC’s legal authority to preempt a 

state’s right to regulate entities organized under its law, such as operating 

subsidiaries of national banks. OCC’s consideration of comments is 

reflected in various documents, including the preamble to the final rule, 

and internal memorandums. While OCC considered the comments, it 

disagreed with several commenters, particularly those who questioned its 

ability to protect consumers and challenged its authority to promulgate its 

rule. However, OCC agreed with some issues raised in the comments and 

made some changes to the final banking activities rule. For instance, 

several consumer groups urged OCC to state that national bank lending 

practices should conform to the Federal Trade Commission Act’s 

prohibition against unfair or deceptive acts or practices. OCC agreed and 

added this language to the final rule. OCC noted that this addition 

augmented standards it set previously in 2003 guidance for banks regarding 

predatory lending.8

 In addition, since the rule was finalized, OCC has issued 

guidance to national banks on avoiding predatory, abusive, unfair, or 

deceptive lending practices.9

Most criticism of OCC’s rulemaking procedures—which came from 

consumer groups, some state officials and their respective organizations, 

some Members of Congress, and others—focused on what some believed 

was a lack of opportunity to discuss and comment on the proposed rules 

and OCC’s issuance of the final rules when some Members of Congress had 

asked for a delay. According to OCC, it provided ample opportunity for 

8

OCC Advisory Letter 2003–2, ‘‘Guidelines for National Banks to Guard Against Predatory 

and Abusive Lending Practices’’ (Feb. 21, 2003) and OCC Advisory Letter 2003–3, ‘‘Avoiding 

Predatory and Abusive Lending Practices in Brokered and Purchased Loans’’ (Feb. 21, 

2003).

9

70 Fed. Reg. 6329 (Feb. 7, 2005).
Page 7 GAO-06-8 OCC Preemption Rulemaking

comment, especially since the rules were not “new law,” but reflected 

precedents and standards already applied by OCC or courts. Although OCC 

briefed several Members of Congress about the rules before they were 

issued, some criticized OCC for issuing the rules while Congress was out of 

session and not allowing additional time for congressional hearings about 

many issues raised by the proposed rules. From OCC’s perspective, the 

length of the delay that some members were requesting was unclear and 

other members did not endorse a delay. According to OCC officials, a 

lengthy delay would have created more uncertainty for national banks 

regarding the applicability of state or local laws and could have led some 

lenders to stop lending in certain markets because of variations in state or 

local laws, challenges in complying with them, and difficulties in selling 

loans made under state and local laws. Consumer groups we interviewed 

also suggested that OCC should have offered additional mechanisms for 

soliciting public input in its rulemaking. Other financial institution 

regulators have used additional mechanisms for public comment when 

they deemed rulemakings controversial. For example, some had used 

“public meeting type” hearings. According to OCC officials, they did not 

take such actions because they believed that they fully understood the 

points of view of all stakeholders. Measures such as public meetings might 

have promoted greater understanding of the preemption rules and provided

opportunities for building more constructive relationships between federal 

and state authorities. 

We provided a draft of this report to OCC for review and comment. In 

written comments, the Comptroller of the Currency (see app. II) concurred 

with our observation that its rulemaking process could benefit from 

detailed written rulemaking procedures and the agency intends to develop 

them by year-end 2005. OCC disagreed with our observation that its 

documentation did not articulate the analysis underlying its conclusion that 

the rules were “not significant” for purposes of E.O. 12866. We examined 

OCC’s documentation and found it consisted of stating that the rules were 

not a significant regulatory action as defined by the executive order 

because the annual effect on the economy was less than $100 million. 

However, OCC’s documentation did not address other criteria set forth in 

the order, such as whether a rule would have an adverse effect in a material 

way on state, local, or tribal governments or communities. Thus, we 

continue to disagree with OCC. Although OCC maintained that its efforts to 

consult with state officials and organizations were appropriate for the 

preemption rulemakings, it intends to enhance those efforts. OCC also 

provided technical comments that we incorporated, as appropriate.
Page 8 GAO-06-8 OCC Preemption Rulemaking

Background The federal agency rulemaking process is subject to statutory requirements 

and executive orders issued by the President. Summaries or brief 

discussions of OCC’s mission and program areas (including regulation), the 

statutes and executive orders pertaining to rulemaking, and the legal basis 

for preemption follow.

OCC Mission and 

Regulatory Responsibilities 

OCC’s mission focuses on the chartering and oversight of national banks to 

assure their safety and soundness and on fair access to financial services 

and fair treatment of bank customers. OCC is one of five federal regulators 

of institutions whose deposits are federally insured—the other four are the 

Board of Governors of the Federal Reserve System (Federal Reserve), the 

Federal Deposit Insurance Corporation (FDIC), the Office of Thrift 

Supervision (OTS), and the National Credit Union Administration (NCUA). 

While the Federal Reserve and FDIC share supervision of state-chartered 

banks with the states, OCC is the sole supervisor for national banks. OTS 

oversees thrifts or savings and loan institutions and NCUA oversees credit 

unions and insures the member deposits at federally insured credit unions.

OCC groups its regulatory responsibilities into three program areas: 

chartering, regulation, and supervision. Chartering activities include not 

only review and approval of charters, but also review and approval of 

mergers, acquisitions, and reorganizations. Regulatory activities result in 

the establishment of regulations, policies, operating guidance, 

interpretations, and examination policies and handbooks. OCC’s 

supervisory activities encompass bank examinations and enforcement 

activities; dispute resolution; ongoing monitoring of banks; and analysis of 

systemic risk and market trends. Additionally, in its most recent strategic 

plan, OCC identified its regulatory approach as one that would ensure that 

national banks operated in a “flexible legal and regulatory framework” that 

enables them to provide a “full competitive array” of financial services. The 

plan also included fair access to financial services and fair treatment of 

bank customers as a strategic goal. The agency also emphasized that it 

would “support continued recognition of the preemptive attributes of the 

national bank charter through appropriate opinions, regulations, and 

participation in litigation where warranted.”

As of March 2005, the assets of the banks that OCC supervises account for 

approximately 67 percent—about $5.8 trillion—of assets in commercial 

banks. Among the more than 1,800 banks OCC supervises are 14 of the top 
Page 9 GAO-06-8 OCC Preemption Rulemaking

20 commercial banks in asset size. OCC also supervises federal branches 

and agencies of foreign banks.

Statutory Rulemaking 

Requirements

Section 553 of the Administrative Procedure Act (APA) contains 

requirements for the most long-standing and broadly applicable type of 

federal rulemaking, commonly referred to as “informal rulemaking” or 

“notice and comment” rulemaking.10 Most federal rulemaking is conducted 

as informal rulemaking, in which agencies publish a notice of proposed 

rulemaking in the Federal Register and provide “interested persons” with 

an opportunity to comment on the proposed rule.11 The act does not specify 

the length of the comment period, but agencies commonly provide at least 

30 days. The act does not mandate that an agency hold oral, or “public 

meeting type,” hearings during the comment period for informal 

rulemaking; instead, it allows an agency to decide whether to hold a 

hearing.12 After giving interested persons an opportunity to comment on 

the proposed rule, and after considering the public comments, the agency 

may then publish the final rule, incorporating a general statement of its 

basis and purpose.13 The APA’s notice and comment procedures do not 

apply to interpretative rules; general statements of policy; or rules that deal 

with agency organization, procedure, or practice. 

The Congressional Review Act (CRA) allows Congress to review proposed 

federal regulations and also contains provisions by which Congress may 

10The APA also contains requirements for formal rulemaking, which is used in rate-making 

proceedings and in other cases where statute requires that rules be made “on the record.” 

Formal rulemaking incorporates evidentiary (or “trial type”) hearings, in which interested 

parties may present evidence, conduct cross-examinations of other witnesses, and submit 

rebuttal evidence. However, few statutes require such on-the-record hearings. 

115 U.S.C. § 553 (2000). The notice is to contain (1) a statement of the time, place, and nature 

of public rulemaking proceedings; (2) reference to the legal authority under which the rule 

is proposed; and (3) either the terms or substance of the proposed rule or a description of 

the subjects and issues involved. 

125 U.S.C. § 553 (c). As noted later in this report, by following APA procedures and allowing 

for a comment period of more than 30 days, OCC also followed the procedures for 

preemptive interpretative rules contained in 12 U.S.C. § 43. 

13The act states that the rule cannot become effective until at least 30 days after its 

publication unless (1) the rule grants or recognizes an exemption or relieves a restriction, 

(2) the rule is an interpretative rule or a statement of federal rulemaking policy, or (3) the 

agency determines that the rule should take effect sooner for good cause and publish that 

determination with the rule.
Page 10 GAO-06-8 OCC Preemption Rulemaking

disapprove agency rules.14 Before any final rule can become effective, CRA 

requires that it be filed with each house of Congress and us. The act also 

requires federal agencies to submit to us and make available to each house 

of Congress a copy of any cost-benefit analysis prepared for the rule. If the 

rule is designated by OMB’s Office of Information and Regulatory Affairs as 

“major” (that is, having a $100 million impact on the economy or having 

another characteristic contained in the act), the agency must delay the 

rule’s effective date by 60 days after publication in the Federal Register or 

submission to Congress and us, whichever is later.15 Within 15 days of 

receiving a major rule, we are required to provide Congress with a report 

assessing the agency’s compliance with various acts and executive orders 

applicable to the rulemaking process. Finally, under CRA, congressional 

members can introduce a joint resolution of disapproval for any rule 

regardless of whether it is designated as major. To date, Congress has 

issued such a resolution only once—by disapproving the Occupational 

Safety and Health Administration’s ergonomics standards in 2001.16

The Regulatory Flexibility Act of 1980 (RFA) generally requires federal 

agencies to assess the impact of their regulation on “small entities,” 

including businesses, governmental jurisdictions, and certain not-for profit 

organizations having characteristics set forth in the act.17 Under RFA, 

Cabinet departments and independent agencies generally must prepare a 

“regulatory flexibility analysis” in connection with proposed and certain 

final rules, unless the head of the issuing agency determines that the 

proposed rule would not have a “significant economic impact” upon a 

substantial number of small entities. The analysis must include, among 

other things, (1) the reasons why the regulatory action is being considered; 

(2) the small entities to which the proposed rule will apply and, where 

145 U.S.C. §§ 801-808.

15A major rule is defined as a rule that will likely have an annual effect on the economy of 

$100 million or more; increase costs or prices for consumers, industries, or state and local 

governments; or have significant adverse effects on the economy. 

16On November 14, 2000, the Occupational and Safety Health Administration promulgated an 

ergonomics standard. It would have required employers to set up control programs for job 

categories where “work-related musculoskeletal disorders” are reported. In the debate over 

ergonomics, large monetary estimates have been cited for both the benefits of a national 

standard and the costs thereof. After the final standard was released in November 2000, 

opponents of the Occupational Safety and Health Administration’s approach introduced and 

quickly passed a congressional resolution of disapproval that revoked the rule. 

175 U.S.C. §§ 601-612.
Page 11 GAO-06-8 OCC Preemption Rulemaking

feasible, an estimate of their numbers; and (3) the projected reporting, 

record keeping, and other compliance requirements of the proposed rule. 

Congress enacted the Unfunded Mandates Reform Act of 1995 (UMRA) to 

reduce the costs associated with federal imposition of responsibilities, 

duties, and regulations upon state, local, and tribal governments, and the 

private sector. Title II of the act generally requires covered federal agencies 

to prepare a written statement containing specific information about costs 

and benefits for any published rule that includes a federal mandate that 

may result in expenditures by state, local, and tribal governments (in the 

aggregate) or the private sector of $100 million or more in any year. 

Executive Orders on 

Rulemaking

In addition to statutory requirements, certain agencies, including OCC, are 

subject to Executive Order 12866, “Regulatory Planning and Review” (E.O. 

12866) and Executive Order 13132, “Federalism” (E.O. 13132). Under E.O. 

12866, issued in 1993, covered agencies must submit their “significant” 

rules to the Office of Management and Budget (OMB) before publishing 

them in the Federal Register.

18 Agencies also are required to prepare a 

detailed economic analysis for any regulatory actions that are 

“economically significant” (that is, have an annual effect on the economy of 

$100 million or more or have a material adverse effect as described in the 

order). The analysis should include an assessment of anticipated costs and 

benefits of the action as well as the costs and benefits of “potentially 

effective and reasonably feasible alternatives.” In choosing among 

alternatives, an agency should select approaches that maximize benefits, 

and base its decision on the best “reasonably obtainable” information. In 

1996, OMB issued “best practices” guidance on preparing cost-benefit 

analyses under the order, which gives agencies substantial flexibility on 

preparing the analyses, but also prescribes certain elements and requires 

that the analysis be “transparent”—that is, that an agency disclose how it 

conducted the study, what assumptions it used, and what the implications 

of plausible alternative assumptions are.

18GAO, Rulemaking: OMB’s Role in Reviews of Agencies’ Draft Rules and the 

Transparency of Those Reviews, GAO-03-929 (Washington, D.C.: Sept. 22, 2003), 24. Before 

the issuance of E.O. 12866, OMB reviewed all proposed federal rules. Subsequently, OMB 

reviewed only significant rules and the number of regulations reviewed annually declined 

from 2,000-3,000 to 500-700.
Page 12 GAO-06-8 OCC Preemption Rulemaking

Executive Order 13132 addresses the division of governmental 

responsibilities between the national government and the states as 

envisioned by the framers of the Constitution. The order contains 

principles, policymaking criteria, and requirements for agencies to apply 

and follow when formulating “policies that have federalism implications,” 

which are defined to include “regulations . . . and other policy statements or 

actions that have substantial direct effects on the States, on the 

relationship between the national government and the states, or on the 

distribution of power and responsibilities among the various levels of 

government.” The order includes special requirements for agency actions 

that preempt state law. Also, E.O. 13132 specifies that rulemaking that has 

federalism implications be conducted through an “accountable process” 

and ensure “meaningful and timely” input by state and local officials. 

Further, the order directs the agency to provide to the Director of OMB a 

federalism summary impact statement, which would include: (1) a 

description of the extent of the agency’s prior consultation with state and 

local officials, (2) a summary of the nature of their concerns, (3) the 

agency’s position supporting the need to issue the regulation, and (4) a 

statement of the extent to which the concerns of state and local offices 

have been met. 

Legal Basis for Preemption Preemption of state law is rooted in the Constitution’s Supremacy Clause, 

which provides that federal law is the “supreme law of the land.” Because 

both the federal and state governments have roles in regulating financial 

institutions, questions can arise about whether the governing federal 

statute preempts particular state laws. Analysis of whether federal law 

preempts state law has turned on whether Congress intended that federal 

law overrides state law. Courts traditionally have divided preemption 

analysis into categories of “express” and “implied” preemptions. 

At times, Congress may declare in express terms its intention to preclude 

or override state regulation in a given area. With an express preemption, 

Congress’s intent to preempt state law is clear in the statute. In addition to 

express preemption, preemption may be implied from the federal statute’s 

structure and purpose. Courts have identified two types of implied 

preemptions: “field preemptions” and “conflict preemptions.” In the case of 

field preemption, a court basically finds that the federal government has so 

“occupied the field” in a given area that there is no room for state 

legislation. Conflict preemption occurs when a court concludes that state 

law is in irreconcilable conflict with federal law. In these instances, a court 

finds that while Congress did not intend necessarily to preempt state 
Page 13 GAO-06-8 OCC Preemption Rulemaking

regulation in a given area, state law that conflicts directly with federal law 

or stands as an obstacle to the accomplishment of federal objectives is 

preempted.19

Before the promulgation of its preemption rules, OCC primarily addressed 

preemption issues through opinion letters, issued in response to a specific 

inquiry from an institution or state.20 In 2000, we examined OCC’s authority 

and approaches in preempting state laws.21 We reported that OCC, applying 

conflict preemption analysis, issued interpretations of whether federal 

laws preempt state laws in opinions and corporate decisions. In the 

opinions and decisions it issued, prior to January 2004, particularly in the 

area of making loans and taking deposits, the Comptroller maintained 

consistently that state laws that conflict with national bank powers 

authorized under the National Bank Act are preempted. Additionally, OCC’s 

opinions, based on regulations, on real estate lending specifically 

preempted state laws in five areas relating to certain loan terms and 

conditions, and stated that OCC would apply “recognized principles of 

federal preemption” when considering whether state laws apply to other 

aspects of real estate lending by national banks.22

19Jones v. Rath Packing Co., 430 U.S. 519, 525-526 (1977). 

20See, e.g., 1978 OCC Letter No. 61 (Sept. 11, 1978), Ref. No. L31, 1978 OCC Ltr. Lexis 57 

(preemption under the National Bank Act involves conflict analysis necessitating separate 

and individual review of all provisions of state redlining law; provisions of state law spelling 

out certain requirements with respect to national bank’s credit terms and policies not 

preempted, but related reporting and investigation provisions preempted based on OCC 

visitorial powers authority); 1985 OCC Unpublished Interpretive Letter 122 (July 19, 1985) 

(because national banks have specific and independent authority under federal law to make 

real estate loans, licensing requirements of state law governing secondary mortgage loans 

were preempted with respect to national bank); 1993 OCC Ltr. No. 616 (February 26, 1993), 

1993 OCC Lexis 10 (state statute requiring credit card issuers to provide information to state 

supervisor is a form of visitation preempted by OCC visitorial powers authority).

21GAO, Role of the Office of Thrift Supervision and Office of the Comptroller of the 

Currency in the Preemption of State Law, GAO/GGD/OGC-00-51R (Washington, D.C.: Feb. 

7, 2000). 

22See, e.g., 12 C.F.R. § 34.4 (2003). The five areas of state law specifically subjected to 

preemption related to: (1) the amount of a loan in relation to the appraised value of the real 

estate, (2) the schedule for the repayment of principal and interest, (3) the term to maturity 

of the loan, (4) the aggregate amount of funds that may be loaned upon the security of real 

estate, and (5) the covenants and restrictions that must be contained in a lease to qualify the 

leasehold as acceptable security for a real estate loan.
Page 14 GAO-06-8 OCC Preemption Rulemaking

OCC Generally 

Followed Rulemaking 

Requirements but 

Lacked Documentation 

and Written Guidance, 

Making It Hard to 

Verify Consultation 

Efforts 

OCC followed the statutory framework in conducting its preemption 

rulemaking, but we found it difficult to assess some of the other actions it 

took in the rulemaking, particularly consultations with the states, because 

OCC did not always document its actions and had no written guidance or 

procedures detailing the rulemaking process. In conducting its rulemaking, 

OCC followed the requirements of the APA, CRA, RFA, and UMRA. OCC 

also is subject to both Executive Orders 12866 and 13132, and designated 

both preemption rules as “not significant” for purposes of Executive Order 

12866, but staff memorandums, in the rulemaking files, did not articulate 

the analysis underlying the determination. We also found that the lack of 

substantive documentation about OCC’s consultation with stakeholders 

made it difficult to verify whether OCC helped ensure “meaningful and 

timely input” by state and local officials. Further, while OCC staff used a 

checklist to document completion of internal reviews and ensure that 

documents were routed properly, OCC did not have written guidance to 

follow in conducting the rulemaking process. Moreover, OCC did not 

document the substance of its consultation with states or with other OCC 

offices. In contrast, other federal agencies with missions similar to OCC’s 

have developed some rulemaking guidance for their staffs to follow. 

OCC Followed the 

Administrative Procedure 

Act in Its Rulemaking 

In promulgating both the visitorial powers and banking activities rules, 

OCC followed the process for informal rulemaking prescribed in the APA.23

In the preambles to the visitorial powers and banking activities proposals 

and final rules, OCC described the rulemakings as “clarifications” of 

interpretations of the scope and preemptive effect of the pertinent

23The preemptive aspects of the rules express OCC’s interpretation of the National Bank Act. 

APA informal rulemaking requirements do not apply to interpretative rules. Because OCC 

used APA rulemaking procedures, we did not analyze whether those rules were 

interpretative for purposes of the APA. OCC, by following APA procedures and allowing a 

comment period of more than 30 days, also followed the requirements for preemptive 

interpretive rules under 12 U.S.C. §43. 
Page 15 GAO-06-8 OCC Preemption Rulemaking

provisions of the National Bank Act and not as “new law.”24 However, OCC 

followed APA procedures for informal rulemaking by providing notice of 

the proposed rules and an opportunity for public comment, and also 

doubled the traditional 30-day comment period to 60 days and satisfied 

other requirements of the act, including consideration and discussion of 

comments on the rule, as we discuss later in this report. The visitorial 

powers proposal was published in the Federal Register on February 7, 

2003, and OCC requested receipt of comments by April 8, 2003. The 

banking activities proposal was published on August 5, 2003, and OCC 

requested receipt of comments by October 6, 2003. Final drafts of both 

rules were published on January 13, 2004, with an effective date of 

February 12, 2004.

OCC Followed Other Laws OCC also followed the provisions of CRA, RFA, and UMRA. Pursuant to the 

CRA, OCC sent copies of the final preemption rules to both houses of 

Congress and to our Office of General Counsel on January 7, 2004, prior to 

their effective date of February 12, 2004. Further, OMB did not make a 

determination that the rules were major rules for purposes of the CRA. It 

based its decision on OCC’s determination that neither rule would have a 

significant impact on the economy. 

As described previously, the purposes of CRA include providing Members 

of Congress with an opportunity to disapprove of an agency rulemaking by 

enacting a joint resolution. In the 108th Congress, one senator and one 

representative introduced such a resolution to disapprove OCC’s 

preemption rules. More specifically, House of Representatives bill 4236 and 

Senate Joint Resolution 31 provided for congressional disapproval of 

certain regulations issued by OCC. The House resolution with 35 

co-sponsors, was referred to the Subcommittee on Financial Institutions 

2468 Fed. Reg. 6363, 6366-67 (Feb. 7, 2003) (Proposed visitorial powers rules “interpret and 

implement 12 U.S.C. § 484. . . . This rulemaking contains amendments to (OCC Regulation) § 

7.400 to clarify the application of section 484 to” questions about the scope of OCC’s 

visitorial powers in two broad categories.); 69 Fed. Reg. at 1895 - 96 (Jan. 13, 2004) (Final 

visitorial powers rule changes “serve to clarify that Federal law commits the supervision of 

national banks’ Federally authorized banking business exclusively to OCC. . . . The 

regulatory proposal and the final regulation would not have the effect of preempting 

substantive state laws, but rather would clarify the appropriate agency for enforcing those 

state laws that are applicable to national banks. . . . The proposal and this final rule interpret 

the text of a Federal statute, 12 U.S.C. § 484. . . .”); 68 Fed. Reg. 46119 (Jan. 13, 2004) (Final 

banking activities preemption rules “add provisions clarifying the applicability of state law 

to national banks’ operations.”).
Page 16 GAO-06-8 OCC Preemption Rulemaking

and Consumer Credit of the House Financial Services Committee. The 

Senate resolution, with three co-sponsors, was referred to the Senate 

Committee on Banking, Housing and Urban Affairs. However, neither 

resolution garnered enough support to pass out of the respective 

committees. 

OCC staff determined that the preemption rulemakings were not subject to 

the regulatory flexibility analysis (essentially, potential economic impact 

on small entities) required by RFA. OCC certified that no such impact 

would result from its rulemakings and provided the required statement in 

the preamble to its rules. We reviewed memorandums contained in the files 

that discussed OCC’s consideration of RFA requirements. In an initial 

memorandum on each proposal, OCC’s Policy Analysis Division concluded 

that the preemption proposals did not impose any new requirements or 

burdens on small entities and that the proposal would not have a significant 

economic impact on a substantial number of small entities. In a 

memorandum prepared on each proposal after the public comment period, 

Policy Analysis Division staff concluded that neither individual consumers 

nor state governments could be considered to be small businesses, small 

organizations, or small governmental jurisdictions under RFA and, 

therefore, OCC need not consider the impact of its final rule on consumers 

or state governments under RFA. 

Similarly, OCC determined that, under UMRA, it did not need to prepare a 

written statement during rulemaking, because neither rule would result in 

expenditures by state, local, or tribal governments (in the aggregate), or by 

the private sector, of $100 million or more in any year. OCC also stated this 

position in the preamble of each rule. In a memorandum related to the 

visitorial powers proposal that was written before the comment period, an 

OCC official wrote that the rule “would be permissive rather than 

restrictive and certain provisions permit banks to reorganize in more 

cost-effective ways than is currently the case.” The memorandum 

concluded that private-sector costs associated with the proposed rule 

would be below the $100 million threshold in UMRA. In a memorandum on 

the banking activities proposal, drafted both before and after the public 

comment period, OCC staff concluded that analyses for purposes of UMRA 

were not necessary because the rules would not result in expenditures 

totaling $100 million or more. 
Page 17 GAO-06-8 OCC Preemption Rulemaking

OCC Appears to Have 

Followed Some Provisions 

of the Executive Orders, but 

Its Consultation with the 

States, a Provision of the 

Order on Federalism, 

Appears Limited

Two executive orders pertained to OCC’s preemption rules. E.O. 12866 

directs federal agencies to determine whether rules would be “significant” 

and thus require OMB review. OCC sent a notice to OMB regarding the 

proposed preemption rules stating that the rules did not constitute 

significant regulatory actions under this executive order. OCC officials told 

us that almost all of OCC’s rules are designated as nonsignificant. Further, 

OCC stated that because the preemption rules would clarify already 

existing standards under the National Bank Act, the regulations were 

nonsignificant for purposes of E.O. 12866. While we do not necessarily 

dispute this determination, we found little support for the underlying 

rationale the agency followed in making its decision.

Executive Order 13132, entitled “Federalism,” which was issued in 1999, 

establishes principles and criteria for agencies to follow when formulating 

regulatory policies with federalism implications.25 The order defines these 

policies as including regulations that have “substantial direct effects on the 

States, on the relationship between the national government and the States, 

or on the distribution of power and responsibilities among the various 

levels of government.”26 Under the order, agencies must have an 

“accountable process to ensure meaningful and timely input by state and 

local officials in the development of [such] regulatory policies.”27 The head 

of each agency is to designate an official, who will have primary 

responsibility for ensuring that the agency implements the order, and the 

official is to submit to OMB a description of the agency’s consultation 

process.28

E.O. 13132 creates special requirements for rules with federalism 

implications that preempt state law. When an agency foresees the 

25This executive order is the successor to E.O. 12612, issued in 1987. The Reagan 

administration’s executive order was the first to establish the policy of the Executive 

Branch on federalism. Former President Clinton issued a new executive order on federalism 

in May 1998, but withdrew the order after it received criticism from state and local interests. 

The 1999 order was issued after negotiations between state leaders and the Clinton 

administration. See Jennie H. Blake, Presidential Power Grab or Pure State Might? A 

Modern Debate Over Executive Interpretations On Federalism, 2000 B.Y.U. L. Rev. 293 

(2000).

26Exec. Order No. 13132.

27Id. at section 6(a).

28Id. at section 6(a).
Page 18 GAO-06-8 OCC Preemption Rulemaking

possibility of a conflict between state law and federally protected interests 

within its area of regulatory responsibility, the agency is to “consult, to the 

extent practicable with appropriate state and local officials in an effort to 

avoid such a conflict.”29 If an agency proposes to act through rulemaking to 

preempt state law, the agency “shall provide all affected state and local 

officials notice and an opportunity for appropriate participation in the 

proceedings.”30 “To the extent practicable and permitted by law, no agency 

shall promulgate any regulation that has federalism implications and that 

preempts state law, unless the agency, prior to the formal promulgation of 

the regulation, . . . consulted with state and local officials early in the 

process of developing the proposed regulation.”31 The order also requires 

agencies to submit to OMB a federalism summary impact statement in a 

separately identified portion of the preamble to the regulation, as it is to be 

published in the Federal Register. The federalism summary impact 

statement is to include a description of the agency’s prior consultation with 

state and local officials, a summary of the nature of their concerns, the 

agency’s position supporting the need to issue the regulation, and a 

statement of the extent to which the concerns of state and local officials 

have been met.32 In addition, the agency is to make available to OMB any 

written communications submitted to the agency by state and local 

officials.33 Finally, in transmitting any draft regulation to OMB, the agency 

is to include a certification from the designated federalism official stating 

that the requirements of the order have been met in a meaningful and 

timely manner.34

General guidance exists to aid agencies in interpretation of the 

requirements of the order, including the consultation requirement and the 

special requirements for preemption. OMB issued guidance for heads of 

agencies in implementing E.O. 13132, describing what agencies should do 

to comply with E.O. 13132 and how they should document that compliance

29Id. at section 4(d).

30Id. at section 4(e).

31Id. at section 6(c)(1).

32Id. at section 6(c)(2).

33Id. at section 6(c)(3).

34Id. at section 8(a).
Page 19 GAO-06-8 OCC Preemption Rulemaking

for OMB.35 In connection with the consultation requirement, the guidance 

provides that agencies “should seek comment on . . . preemption as 

appropriate to the nature of the rulemaking under development. The 

timing, nature, and detail of the consultation should also be appropriate to 

the nature of the regulation involved.”36

After the issuance of E.O. 13132, OCC sent a letter on September 17, 1999, 

to the Conference of State Bank Supervisors (CSBS) proposing a process 

by which it would consult with the state bank regulators.37 First, OCC 

asked that CSBS serve as the primary channel for communicating with 

state banking officials when OCC proposed a regulation that had 

federalism implications. Secondly, it proposed to send CSBS the draft of a 

proposed regulation shortly before the document was sent to the Federal 

Register for publication. According to OCC, CSBS would still have 

sufficient time within a rulemaking comment period to distribute the draft 

to its members and receive comments. OCC stated that these comments 

would receive special review in the context of the federalism implications 

of the proposal in question. In response, the CSBS President agreed to act 

as an intermediary between OCC and various state banking departments on 

policy issues that might affect state rulemaking and supervisory authority. 

Although OCC did send the drafts of the proposed rules to CSBS, the extent 

to which it consulted with state officials appeared limited. Following 

publication of the proposed rules, OCC indicated it met twice with CSBS 

representatives. OCC officials offered several reasons why, in their view, 

additional consultation with the states was unnecessary or impracticable. 

They told us that OCC maintained a channel of informal communication 

with CSBS during the period leading up to the rules and, through this 

mechanism, was informed about state concerns, as contemplated by the 

order. In attempting to verify OCC’s established consultation process with 

CSBS, we found that OCC sent letters to CSBS regarding both the visitorial 

powers and the banking activities rules, in which OCC advised CSBS of the 

publication of the proposals. For both proposals, OCC sent the letters a few 

35See OMB, Memorandum for Heads of Executive Departments and Agencies, and 

Independent Regulatory Agencies: Guidance for Implementing E.O. 13132, from John T. 

Spotila, Administrator, Office of Information and Regulatory Affairs (Washington, D.C., Oct. 

28, 1999).

36Id. at section 8.

37The Conference of State Bank Supervisors is an umbrella organization that represents the 

state bank regulators.
Page 20 GAO-06-8 OCC Preemption Rulemaking

days before their publication in the Federal Register. OCC advised CSBS of 

the visitorial powers proposal on January 31, 2003, and the proposal was 

published on February 7, 2003. For the banking activities proposal, CSBS 

received notification on July 30, 2003, before the proposal was published in 

the Federal Register on August 5, 2003. OCC officials stated that because 

the rules codify preemption precedents, they generally did not impose new 

or different standards and as a result, further consultation with the states 

was not necessary. Finally, OCC officials noted that because the rules 

reflect the agency’s understanding of congressional intent about the 

preemptive effect of the National Bank Act, dialogue with the states about 

their role in regulating national banks and their subsidiaries would not have 

raised issues about which OCC was not already aware. 

The OMB guidance strongly recommends that, to the extent that an agency 

has carried out intergovernmental consultations prior to publication of the 

Notice of Proposed Rulemaking, the agency help state and local 

governments, and the public as a whole, by including a “federalism 

summary impact statement” in the preamble to the Notice of Proposed 

Rulemaking.38 Although OCC itself has issued no guidance to assist in 

determining whether a proposed regulation has sufficient federalism 

implications to warrant preparation of a federalism summary impact 

statement, OCC drafted and provided to the Director of OMB the 

federalism summary impact statements. The impact statements included 

information on OCC’s consultation efforts with the states on both rules, the 

concerns of the states, and the extent to which the concerns were 

addressed. As required by the executive order, OCC included the impact 

statements, as part of the preambles of the preemption rules. The content 

of the two impact statements was similar. In providing these materials to 

OMB, OCC certified its compliance with the order. However, we found 

minimal documentation in OCC files related to the federalism summary 

impact statement provision of E.O. 13132. We could determine that OCC 

sent the federalism summary impact statement to OMB because OMB staff 

provided us with the documentation. 

We note that there are no court decisions or other precedents applicable in 

determining what the executive order requires; nevertheless, OCC might 

have considered additional consultative actions to help ensure the 

meaningful and timely input by state and local officials. For example, as 

discussed more fully later in this report, OCC might have considered 

38See OMB’s Guidance for Implementing E.O. 13132, 6.
Page 21 GAO-06-8 OCC Preemption Rulemaking

holding additional meetings with interested parties and providing further 

opportunities for input by entities such as trade groups, state attorneys 

general, and state bank regulators. OCC also might have solicited this input 

by asking for written comments on policy proposals and conducting 

additional outreach to state officials.

While We Could Describe 

the General Process, All of 

OCC’s Actions Were Not 

Fully Documented; 

Additionally, OCC Lacks 

Formal Guidance on 

Rulemaking 

We could not verify all of the actions OCC took to complete its preemption 

rulemaking because OCC did not always document its actions and lacked 

written guidance or procedures detailing the rulemaking process. 

According to Standards for Internal Control in the Federal Government, 

agencies should follow written procedures in making important decisions. 

Absent such documentation, it may not be clear that an agency followed 

applicable requirements and made its decision without bias. The agency 

also needs operating information to determine whether it has met 

requirements under various laws and regulations.39 Moreover, the former 

Administrative Conference of the United States noted, “Rulemaking is not 

just a product of external constraints. The agency’s own processes for 

developing rules and reviewing them internally affect the rulemaking 

environment. Thus, agency management initiatives can have a significant 

impact on the effectiveness and efficiency of rulemaking.”40

We were able to ascertain OCC’s general process for conducting a 

rulemaking, but had to augment our review of the docket files for the 

preemption rules with interviews of OCC officials. Figure 1 illustrates the 

various stages of approval by OCC management and actions taken by OCC 

staff to promulgate regulations. More specifically, the staff of the 

Legislative and Regulatory Activities Division (LRA) is primarily 

responsible for drafting and managing OCC’s rulemaking. The process 

includes various levels of internal review and approval; additionally, OCC 

submits draft proposals to Treasury for informational purposes and to OMB 

to fulfill their responsibility under the executive order. 

39GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C: November 1999), which was prepared to fulfill our statutory requirement 

under the Federal Managers’ Financial Integrity Act of 1982, provides an overall framework 

for establishing and maintaining internal control and for identifying and addressing major 

performance and management challenges and areas at greatest risk of fraud, waste, abuse, 

and mismanagement. 

40Jeffrey Lubbers, “Administrative Conference of the United States Recommendation 93-4: 

Improving the Environment for Agency Rulemaking,” A Guide to Federal Agency 

Rulemaking (Chicago: American Bar Association, 1999), 423. 
Page 22 GAO-06-8 OCC Preemption Rulemaking

Figure 1: OCC Informal Rulemaking Procedures

a

The Legislative and Regulatory Activities Division’s responsibilities include developing and drafting 

OCC’s regulations and ensuring the agency’s compliance with the various federal statutes and 

executive orders that govern the rulemaking process. 

b

In the case of the preemption rules, OCC sent the Conference of State Bank Supervisors the drafts of 

the banking activities and visitorial powers proposals on July 30, 2003, and January 31, 2003, 

respectively. 

c

The visitorial powers proposal was published in the Federal Register on February 7, 2003 (68 Fed. 

Reg. 6363), and the banking activities proposal was published on August 5, 2003 (68 Fed. Reg. 

46119). Both proposals incorporated a 60-day comment period. 

However, OCC does not have written guidance, policies, or procedures 

detailing the rulemaking process. As part of its general agency Policies and 

Procedures Manual, OCC includes guidance on its internal approval 

process for its policymaking and rulemaking. Much of the guidance 

focused on administrative and routing actions of OCC staff. For example, it 

included instructions on staff practices, such as preparing an initiation 

memorandum, an issues memorandum that discusses the project and 

summarizes the issues for OCC staff, and staff actions required for a gold 

border review. The guidance for the gold border review described how staff 

should prepare the reviewers’ memorandum, identify the appropriate 

Draft rule

sent, for 

informational

purposes only, to:

Proposal

published

in Federal

Register

Final

rule

issued

in Federal

Register

LRA staff develop 

draft rulea

LRA staff 

review 

comments

and finalize rule

Gold Border 

Decision

(senior officials

review and provide

comments on drafts)

Red Border 

Decision

(comptroller

reviews and 

approves)

Draft

rule

Final

rule

60

 days

Comment

periodc

OMB

Treasury

Conference of State

Bank Supervisorsb

Source: GAO.

Gold Border 

Decision

(senior officials

review and provide

comments on drafts)

Red Border 

Decision

(comptroller

reviews and 

approves)
Page 23 GAO-06-8 OCC Preemption Rulemaking

reviewers, and secure the required approval signatures. During our review 

of the rulemaking process, OCC revised this guidance. The revised 

guidance, issued on April 26, 2005, provides a more in-depth discussion of 

the gold and red border approval processes. However, neither the previous 

nor revised guidance discussed how OCC staff should implement relevant 

rulemaking laws and executive orders when they are conducting a 

rulemaking. 

OCC did retain some documentation related to the rulemaking in the 

official file, known as a “docket,” for each of the rules. In addition, the 

dockets contained what officials called “a rulemaking checklist.” The 

checklist served as a guide for completing the required reviews and the 

routing of documents (see fig. 2). However, based on our review, the 

checklist did not record the substance of any decisions made during the 

development and the promulgation of the rules. 
Page 24 GAO-06-8 OCC Preemption Rulemaking

Figure 2: Sample OCC Rulemaking Checklist

RULEMAKING CHECKLIST

TITLE:

TYPE OF DOCUMENT: ANPRM NPRM FINAL RULE INTERIM NOTICE

FDIC FRB OTS OTHER

TREASURY ID#: RIN:

INTERAGENCY RULEMAKING: 

CFR PART:

DRAFTER & CONTACTS:

RIN obtained 

NOPRA sent to OMB and Treasury

OMB approved 

Issues memo prepared

Chief Counsel approved gold border for distribution

Gold border distributed. Comments due by:

E-mail notification sent

Economic impact analysis letter received

Red border received

Comptroller signed document. E-mail notification sent.

Treasury approval/comments received

E-mail notification sent

Received Chief Counsel's approval to send to Federal Register

Communications and contacts notified

Document sent to Federal Register. E-mail notification sent

Federal Register edits approved by manager, edits made

Publication date received. E-mail notification sent

Paperwork - Submission sent to OMB. E-mail notification sent

E-mail notification sent

Final rule report sent to Congress and GAO (under Small Business Regulatory Enforcement Fairness Act of 1996)

Banking bulletin prepared

Document published in Federal Register: E-mail notification sent.

Federal Register Cite:

Date comment period ends

Effective date

Small bank compliance guide prepared

Project initiation memo prepared

DATE ACTION

Source: OCC.
Page 25 GAO-06-8 OCC Preemption Rulemaking

As discussed previously, E.O. 12866 directs federal agencies to determine 

whether rules would be “significant” and thus require OMB review, but staff 

memorandums in the rulemaking files did not articulate the analysis 

underlying the determination—although the agency stated in the preambles 

to the final regulations that the rules did not constitute significant 

regulatory actions under this executive order. Also, with respect to E.O. 

13132, “Federalism,” OCC stated that it “consulted with state and local 

officials . . . through the rulemaking process” and met with representatives 

of CSBS to clarify their understanding of the proposals.41 But we found no 

documents detailing OCC’s consultation with CSBS officials or the state 

attorneys general, and without documentation, we could not verify the 

extent or nature of the discussions. According to CSBS officials, they met 

twice with OCC officials regarding the banking activities proposal after its 

publication in the Federal Register; however, in their view, nothing of 

substance was discussed in the meetings. For example, the CSBS officials 

noted that in the second meeting, credit card issues were discussed more 

than anything else. We note that OCC officials described the subject matter 

discussed at these meetings as including the banking activities rule. A state 

attorney general told us that he and several other state attorneys general 

had met with the Comptroller and OCC’s Chief Counsel prior to the banking 

activities rule being issued, but the OCC docket files did not contain any 

documentation of these meetings.42 Further, we found minimal 

documentation in OCC files related to the federalism summary impact 

statement provision of E.O. 13132. 

In addition to the lack of documentation related to consultation and impact 

statement provisions in the executive order, according to OCC officials, 

OCC does not have any written policies about communications with 

interested parties during a rulemaking. The officials added that when OCC 

staff meets with interested parties on a rule proposal, it urges them to draft 

a comment letter and include the issues discussed at the meeting in their 

letter. 

Finally, OCC officials told us that they conferred with other divisions 

within OCC during the rulemaking. However, we did not find 

documentation on staff coordination or input on issues related to the 

4169 Fed. Reg. 1903 (visitorial powers); 69 Fed. Reg. 1915 (bank activities).

42After reviewing our draft, OCC staff provided us with correspondence between OCC 

officials and the state attorneys general that referred to the meeting. 
Page 26 GAO-06-8 OCC Preemption Rulemaking

rulemaking in the docket. For example, the officials told us that they 

consulted with OCC’s Community and Consumer Law staff about some of 

the consumer protection issues being raised in the comment letters and the 

Customer Assistance Group on whether OCC had sufficient resources to 

handle any increase in consumer complaints. The docket files contained no 

information that reflected this consultation. What information on staff 

coordination the docket files did contain focused on routing actions, such 

as preparing documents for publication in the Federal Register. The 

dockets include memorandums between LRA and OCC’s Policy Analysis 

Division staff discussing the Policy Analysis Division staff’s assessment of 

RFA’s and UMRA’s applicability to the proposals. Other than these 

memorandums, the OCC files did not include any additional documentation 

of any analyses that were performed for CRA, RFA, and UMRA purposes. 

For example, OCC officials stated in a memorandum that these rules did 

not meet the criteria under the law without documenting the rationale for 

their decisions. 

FDIC, Treasury, and SEC 

Have Written Guidance for 

Conducting a Rulemaking

FDIC and Treasury have written guidance for their rulemaking and SEC 

staff have also prepared written background materials, which the agencies 

use to assist their respective staffs in the promulgation of rules. Although 

the guidance differed in some cases, generally it summarized the relevant 

laws on rulemaking; identified certain actions that staff should take to 

comply with the laws; and discussed how public comments should be 

handled. In addition, the guidance instructed staff on coordinating with 

other staff members. However, because we did not review the rulemaking 

files or dockets of the other regulators, we could not determine how the 

agencies documented compliance with their guidance.

FDIC’s guidance for rulemaking is contained in FDIC Rules and 

Statements of Policy: Development and Review Guide and Handbook,

which provides information on overall processes for developing and 

reviewing FDIC rules and statements of policy, as well as specific 

procedures for meeting the statutory and other requirements of rules and
Page 27 GAO-06-8 OCC Preemption Rulemaking

statements of policy. The handbook also includes criteria and instructions 

on how to comply with various laws.43

The handbook has instructions that cover promulgation of regulations, 

from project planning to finalizing the rule. For example, it describes 

actions that FDIC staff should follow when preparing a regulatory impact 

analysis, specifying that the analysis should include an introduction, an 

analysis of the proposal, an analysis of an alternative, a quantitative 

analysis, and a conclusion. It goes on to provide more detailed guidance on 

how to prepare discussions of costs, benefits, impacts, risks, and 

quantitative analyses. In addition to procedures for complying with 

rulemaking laws, FDIC guidance outlined steps for staff coordination. 

Treasury has developed guidance for the issuance of regulations, review of 

existing regulations, and preparation of regulatory agendas and plans that 

are governed by various statutes, executive orders, and other authorities. 

Treasury issued its guidance, “Preparation and Review of Regulations,” in 

the form of a directive, which provides offices and bureaus with the 

guidance necessary to comply with the statutory authorities and to obtain 

timely departmental and administration review of regulatory documents. 

According to a Treasury official, its individual offices and bureaus, with the 

exception of the Internal Revenue Service, do not have separate 

rulemaking guidance. The Internal Revenue Service has its own rulemaking 

guidance, but also follows Treasury’s guidance. 

According to OCC officials, the procedures specified in the Treasury 

directive do not apply to OCC because OCC’s regulations are not subject to 

clearance or approval by the department. The officials referred to a 

provision of the National Bank Act (12 U.S.C. § 1) that describes the 

Comptroller’s authority and autonomy over matters within OCC’s

43Executive Orders 12866 and 13132 apply to agencies defined under 44 U.S.C. § 3502(1), but 

not to those considered independent regulatory agencies as defined in section 3502. Since 

FDIC is an independent regulatory agency under section 3502 and is not subject to 

Executive Orders 12866 and 13132, its handbook does not have any procedures on carrying 

out these executive orders. 
Page 28 GAO-06-8 OCC Preemption Rulemaking

jurisdiction.44 Thus, according to OCC officials, while consultation between 

OCC and Treasury occurs on policy matters, the OCC’s regulations are not 

subject to clearance or approval by Treasury. However, according to a 

Treasury official, the Treasury has the opportunity to review and comment 

on each proposed and final regulation prior to issuance. 

We do not challenge the OCC officials’ assertion about the applicability of 

Treasury’s directive, but we note that the directive contains guidance useful 

for assessing the adequacy of opportunities for public participation and 

directs offices and bureaus to allow not less than 60 days for public 

comment on the notice for proposed rulemakings that are designated 

“significant.” The directive also provides guidance on whether regulatory 

actions are significant as defined in E.O. 12866. Treasury’s directive also 

refers to implementing orders on federalism, but refers to E.O. 12612, the 

predecessor of E.O. 13132; thus, we did not use it for comparative or 

illustrative purposes in this report. According to a Treasury official, the 

department is currently updating the directive. 

An overview of regulatory requirements is included in the SEC Compliance 

Handbook, which was revised by its Office of the General Counsel in 

October 1999.45 Based on our review, the handbook provides an overview 

of the relevant rulemaking statutes, such as the CRA and RFA, and other 

suggested steps that SEC staff should consider using in conducting a 

rulemaking. For example, staff should consider consulting with the General 

Counsel and the Office of Economic Analysis and circulating the draft to 

other potentially affected divisions as early as possible. 

Based on our review, the handbook also describes what type of records 

generally should be kept for a rulemaking. It suggests that SEC staff not 

only include among other things internal memorandums and research, but 

also comment letters, a summary of comments, and Office of Economic 

Analysis data. Finally, SEC’s handbook also discusses the regulations 

44See 12 U.S.C. § 1462a(b)(3). Among other things, the section provides that the Secretary of 

the Treasury may not delay or prevent the issuance of any rule or the promulgation of any 

regulation by the Comptroller. It also gives to the Comptroller the same authority over 

matters within OCC’s jurisdiction as the OTS director has over matters within OTS’s 

jurisdiction. The same authority means that the Secretary of the Treasury may not intervene 

in any matter or proceeding before the Comptroller (including agency enforcement actions) 

unless otherwise specifically provided by law. 

45Like FDIC, SEC is an independent regulatory agency under 44 U.S.C. § 3502 and, therefore, 

is not subject to Executive Orders 12866 and 13132.
Page 29 GAO-06-8 OCC Preemption Rulemaking

relevant for determining whether the commission should treat a rule as 

major or “nonmajor” for purposes of CRA. It notes a number of 

documentation and coordination tasks that staff could undertake before 

making the designation. For example, staff members could consider: (1) 

preparing a short memorandum for OMB that briefly describes the rule and 

the reasons why the rule is not major and (2) keeping background 

information supporting the basis for the recommended determination. 

OCC Considered All 

Comments on Its 

Banking Activities 

Rule, and Strongly 

Disagreed with Those 

Challenging Its 

Authority, but Made 

Some Changes in 

Response to Others 

While OCC considered all public comments, it strongly disagreed with 

those questioning its preemption authority or the rule’s negative effects on 

consumers; however, it did make changes to the rule in response to some 

comments. OCC reviewed and considered approximately 2,700 comment 

letters submitted by a variety of consumer groups, public officials, 

businesspeople, and others in response to its banking activities proposal. 

Our analysis of the comment letters revealed that commenters, among 

other things, focused on what they believed would be the rule’s effect to 

diminish enforcement of state consumer protection laws, questions about 

OCC’s legal analysis, and conclusions justifying preemption and the rule’s 

effect on the dual banking system. OCC’s consideration of the comments is 

reflected in a number of sources, including the final rule. While OCC 

considered the comments, it strongly disagreed with those that challenged 

its ability to protect consumers and its authority to promulgate its rule. For 

example, OCC maintained that its banking activities rule does not affect a 

state’s ability to protect consumers from institutions that might engage in 

predatory practices but rather upholds its responsibility of ensuring the 

efficient operation of the national banking system as authorized by 

Congress, and preserves the dual banking system. However, OCC agreed 

with some of the comments it received and made changes to its proposed 

rule, including adding some information to clarify parts of the rule, such as 

its anti-predatory lending standard. 
Page 30 GAO-06-8 OCC Preemption Rulemaking

A Variety of Commenters 

Responded to the Proposed 

Banking Activities Rule 

OCC received approximately 2,700 comments on the proposal from a 

variety of consumer groups, public officials, businesspeople, and other 

individuals. The majority of comments (83 percent) were form letters 

written in opposition to the proposal and submitted by Realtors and other 

individuals.46 Figure 3, which is based on our analysis of 373 nonform 

comment letters, illustrates the composition of commenters by group and 

position (that is, opponent, proponent, or other). Our analysis of the 

content of the nonform letters indicated that 85 percent of these 

commenters were opposed to the proposal and expressed a variety of 

concerns. We found that 10 percent of the commenters favored the 

proposal. The remaining 5 percent of commenters neither opposed nor 

supported the proposal—rather, in some instances these commenters 

requested additional information to clarify certain aspects of the proposal. 

46We found that 2,250 comment letters submitted to OCC were form letters from Realtors 

and other individuals. The Realtor form letters expressed identical concerns: that national 

banks’ financial subsidiaries would be permitted to engage in real estate brokerage activities 

without complying with state real estate brokerage licensing laws if the Board of Governors 

of the Federal Reserve were to determine that real estate brokerage is an activity 

permissible for qualified bank holding companies. Some individual commenters who also 

submitted essentially the same form letter expressed concerns about the effect of the 

preemption regulation on state consumer protection laws.
Page 31 GAO-06-8 OCC Preemption Rulemaking

Figure 3: Composition of Commenters, Based on Our Analysis of 373 Nonform Letters

The Majority of the 

Commenters Raised 

Concerns about Potentially 

Weakening of Consumer 

Protections

Based on our analysis of the comment letters, we found that most 

commenters opposed to the proposed rule cited concerns about weakened 

consumer protections. These and other concerns raised in comment letters 

in opposition to OCC’s banking activities proposal are summarized in figure 

4. They also contended that because national banks, with their 

considerable presence in the lending market, would no longer be subject to 

certain state consumer protection laws, consumers would be vulnerable to 

various forms of predatory lending. Comments from state officials argued 

that a lack of state regulation would create “an enormous vacuum of 

consumer protection without adequate federal regulation to fill the gap.” 

Many of these commenters suggested that OCC needed to do more, not 

less, to protect consumers. They believed that some state-enacted fair 

lending legislation addressed certain predatory lending practices and cited 

0

20

40

60

80

100

Other

Pro

Con

State

banks

(2)

Governors

(3)

State

attorneys

general

(4)

Congressional

members

(13)

National

banks

(19)

Bank

industry

[other]

(19)

Miscellaneous/

other 

(33)

State

legislators

(27)

State and

local

agencies

(47)

Realtors

 (54)

Consumer

groups

(70)

Individuals

(82)

Number of comments

Commenter types

Source: GAO.
Page 32 GAO-06-8 OCC Preemption Rulemaking

as an example legislative efforts that mirrored the federal Home Ownership 

Equity Protection Act, yet provided stronger consumer protections. 

According to these commenters, these state laws defined and restricted 

high-cost loans that were more likely to be abusive or predatory and 

characteristic of trade practices, such as loan flipping, fee packing, and 

equity stripping. However, they maintained that the banking activities rule 

would eliminate the protections afforded by these state laws. They 

concluded that OCC should have refrained from preempting these state 

laws or, at the very least, incorporated principles from its 2003 guidance on 

predatory lending and abusive practices, which they argued cites some of 

the same fraudulent trade practices defined by these state laws and were 

determined by OCC to be unfair, deceptive, and likely violate the Federal 

Trade Commission Act. Commenters also urged OCC to affirmatively 

articulate that a national bank’s lending practices must be conducted in 

conformance with section 5 of the Federal Trade Commission Act, which 

makes unlawful ‘‘unfair or deceptive acts or practices.’’ 
Page 33 GAO-06-8 OCC Preemption Rulemaking

Figure 4: Frequently Cited Concerns of Selected Commenters Opposed to OCC’s Banking Activities Proposal

Note: We based our analysis on 373 comment letters (nonform letters) submitted to OCC during the 

public comment period for the banking activities proposal. 

Consumer groups and state officials commented that OCC’s rule would 

cripple states’ ability to regulate national banks and their operating 

subsidiaries, and in the process potentially increase the number of 

consumer complaints sent to OCC regarding national banks and their 

operating subsidiaries. They asserted that OCC did not have the capacity to 

adequately handle an increased volume of complaints, and argued that 

“with an already fully engaged staff of national bank examiners and OCC 

employees, the Comptroller cannot match the resources of state banking 

Consumer

 groups

Congressional

 members

 Individuals

State and

 local agencies

State

 legislators

 Realtors

Concerns that OCC may be too focused on promoting the interests of its regulated entities to 

effectively regulate them.

Preemption rules may have a negative impact on state-chartered banking, which is critical to 

the ability of state officials to promote economic development and respond to local economic 

needs.

Concerns describing the detriment of limiting state involvement in the regulation of the 

banking industry, which may limit future legislation; states are more responsive, offer more 

timely legislative corrections, and are more creative in their lawmaking.

Concerns that OCC could further attempt to exempt national banks from laws that would 

otherwise apply.

Concerns that OCC’s “Working Paper on Predatory Lending” and other studies that have 

examined the effect of state predatory lending laws on consumer markets have not 

produced definitive results.

Describes the concerns of the real estate industry regarding licensing issues.

Comments arguing that consumers continue to be victims of deceptive trade practices, 

including predatory lending.

Concerns about the diminishing effect of the bank activities preemption proposal on the 

enforcement of state consumer protection laws and the amount of resources that the OCC has 

to devote to consumer complaints.

Concerns about OCC’s legal analysis and conclusions justifying preemption.

Concerns regarding state and local agencies’ ability to regulate operating subsidiaries (Realtors, 

consumer groups, state and local, state legislators).

Concerns that OCC’s bank activities preemption proposal will threaten the dual banking system. 

Source: GAO.
Page 34 GAO-06-8 OCC Preemption Rulemaking

departments, consumer credit divisions, and offices of state attorneys 

general that currently work to identify fraudulent and abusive practices.” 

The issues cited next most frequently (by commenters opposed to the rule) 

dealt with the legal basis for preempting state regulation of national banks’ 

operating subsidiaries. The commenters questioned OCC’s legal authority 

to promulgate the rule, asserting that OCC did not properly apply the legal 

standard for preemption and did not have a legal basis for preempting state 

laws with respect to national bank operating subsidiaries. These 

commenters stated that preempting the application of state laws to 

operating subsidiaries would infringe on states’ rights to regulate entities 

that they license. They asserted that OCC’s preemption proposal would 

“federalize” national bank operating subsidiaries, many of which are 

state-licensed.47 Additionally, commenters noted that if finalized, OCC’s 

preemption rule would prevent states from regulating these entities and 

would diminish the states’ ability to protect their citizens. State officials 

contended that federal banking statutes and state corporate laws establish 

a clear separation between national banks and their “affiliates,” including 

their operating subsidiaries. Accordingly, these commenters believed that 

OCC did not have the power to bar states from licensing, examining, and 

otherwise regulating state-licensed corporations, including those affiliated 

with national banks. This issue was of particular concern to commenters 

who believed that certain national bank operating subsidiaries engaged in 

predatory and abusive practices. Another commenter suggested that OCC’s 

rule would encourage lenders to “restructure as operating subsidiaries of 

national banks to avoid certain consumer protection restrictions.” 

Commenters also expressed concerns about the effect of the rule on the 

dual banking system and contended that OCC’s rule would promote a “race 

to the bottom” in consumer protection. Consumer groups and state 

officials held that the banking activities rule could put national banks at an 

advantage over other financial institutions and blur the well-established 

competitive marketplaces of each state. They argued that the result would 

be a reduction in regulatory oversight in the banking industry because 

other bank regulators would be encouraged to reduce their regulatory 

efforts to match what some considered “subpar” standards being set for 

national banks. State officials believed that this result would be inevitable 

47National banks are not subject to state chartering requirements or laws governing the formation and 

conduct of business entities. National bank operating subsidiaries, however, typically are formed under 

the laws of a particular state.
Page 35 GAO-06-8 OCC Preemption Rulemaking

because regulatory control of the banking industry would be concentrated 

in OCC. 

State officials and consumer group commenters asserted that OCC took a 

sweeping approach to preemption in its proposal. They noted that a state 

law generally would apply to a national bank only if the state law fit into 

one of a few limited categories or if OCC decided that the particular state 

law has “only incidentally affected” the exercise of national bank powers or 

is otherwise consistent with the rule itself. Commenters contended that 

absent specific consent from OCC, the only types of state laws that would 

ordinarily apply to national banks are those enumerated in the proposal 

(such as those pertaining to contracts, torts, and criminal law). They stated 

that national banks could even be exempted from these types of laws if 

OCC decided that one of these types of state law marginally affected the 

exercise of national bank power. These commenters concluded that the 

national bank charter could become a “get out of jail free” card.

Generally, proponents of OCC’s preemption proposal, largely national 

banks and others representing the banking industry, stated that the rule 

promoted a uniform national regulatory standard, which they viewed as a 

significant benefit to national banks and argued that field preemption 

would allow national banks to provide services on a multistate basis 

without being subject to a patchwork of conflicting and inconsistent state 

laws. According to these groups, without a national standard, national 

banks operating under varied state laws faced increased costs, compliance 

burdens, and possible litigation because of not being able to comply with 

each and every requirement. Further, they contended that some national 

banks could be forced to limit certain products and services in jurisdictions 

where state and local laws imposed different standards, thus harming 

consumers. They suggested that these state laws would ultimately harm the 

national bank system and therefore urged OCC to adopt an “occupation of 

the field” preemption standard concerning national bank real estate 

lending.

National bank industry commenters also expressed concern that the 

proposed anti-predatory lending standard prevented national banks from 

making loans based predominantly on the foreclosure value of a borrower’s 

collateral—that is, without regard to the borrower’s repayment ability. 

These commenters contended that this new standard would prevent 

national banks from making legitimate loans, for example, to high net 

worth individuals whose ongoing cash flow could be sufficient to repay the 
Page 36 GAO-06-8 OCC Preemption Rulemaking

loan. These commenters noted that reverse mortgage, small business, and 

high net worth loans are often made based on the value of the collateral. 

Supporting commenters also asked OCC to clarify particular parts of its 

proposal. For example, several commenters noted that section 34.4(a) of 

the banking activities preemption proposal lists “categories” of state laws 

that are preempted, but did not specifically enumerate which state laws 

would be preempted. A number of these commenters asked OCC to list in 

its final rule specific state laws imposing various limitations on mortgage 

underwriting and servicing and those state laws pertaining to debt 

collection, which were not determined to be preempted in the proposal. 

In Response to Comments, 

OCC Reasserted Its 

Preemption Authority but 

Made Some Changes in the 

Final Rule 

We analyzed a variety of sources and determined that while OCC 

considered all of the comments it received during the banking activities 

rulemaking, they strongly disagreed with commenters that doubted their 

ability to protect consumers as well as those that questioned their 

preemption authority. OCC stated in the preamble to the final rule that 

national banks and their operating subsidiaries would be regulated by 

strong federal standards and any abusive practices would not be tolerated. 

Moreover, OCC maintained that national banks were not the source of 

predatory and abusive lending practices. The Comptroller also suggested 

that the banking activities rule did not affect a state’s ability to protect 

vulnerable consumers from other types of lending institutions that might 

engage in predatory practices. The Comptroller emphatically suggested 

that the banking activities preemption standards “are comprehensive and 

apply nationwide, to all national banks. The rules apply strong protections 

for national bank customers in every state—including the majority of states 

that do not have their own anti-predatory lending standards.”

According to OCC officials, the agency has a comprehensive consumer 

protection effort focused on national banks and operating subsidiaries 

(consisting of its supervisory and enforcement functions, the Customer 

Assistance Group, and the Community and Consumer Law and 

Enforcement and Compliance divisions of the Law Department). According 

to OCC, this effort includes enforcement of applicable state laws and a 

comprehensive array of federal consumer protection laws. This consumer 

protection effort will be the focus of one of our forthcoming reports. OCC 

also maintained that states increasingly face budget constraints, and their 

insistence on adding national bank supervision to an ever-increasing list of 

responsibilities would likely detract from “the availability of state 

resources to protect consumers in other areas—other areas where there is 
Page 37 GAO-06-8 OCC Preemption Rulemaking

evidence of abusive lending—other areas that are not as highly regulated as 

the banking business.”

OCC restated its authority to promulgate its banking activities rule 

throughout the preamble to the final banking activities rule, maintaining 

that it is charged with the primary responsibility of making certain that 

national banks operate efficiently and to the full extent of their powers 

under federal law.48 Moreover, OCC contended that its regulation codifies 

existing determinations and prior Supreme Court decisions regarding 

national bank operations and had no effect on regulations previously 

established to govern the activities of national bank operating subsidiaries. 

Pursuant to OCC regulation, national bank operating subsidiaries conduct 

their activities subject to the same terms and conditions that apply to the 

parent banks, except where federal law provides otherwise.49

OCC noted in the preamble to the final banking activities rule that 

differences between state-chartered banks and federally chartered banks 

and the supervision of each were the “defining characteristics” of the dual 

banking system and that its final rule would preserve, not undermine, this 

system. The preamble concluded that OCC fundamentally disagreed with 

state and local officials on this issue and asserted that the rule was a 

necessary component to “enable national banks to operate to the full 

extent of their powers under federal law, and without interference from 

inconsistent state laws; consistent with the national character of the 

national banks; and in furtherance of their safe and sound operations.”50

However, OCC acknowledged the concerns of both opponents and 

supporters of the proposal and made some changes based on their 

comments. For instance, OCC added an express reference to section 5 of 

the Federal Trade Commission Act, which makes unlawful ‘‘unfair or 

deceptive acts or practices,’’ in response to commenters who urged OCC to 

48This responsibility includes helping to ensure that national banks operate as authorized by 

Congress, in alignment with the essential character of a national banking system and 

without undue constraint of their powers. OCC also explained that federal law gives it broad 

rulemaking authority to fulfill its regulatory responsibilities and cited 12 U.S.C. 93a, which 

explains how OCC is authorized ‘‘to prescribe rules and regulations to carry out the 

responsibilities of the office,’’ and 12 U.S.C. 371, which authorizes OCC to ‘‘prescribe by 

regulation or order’’ the ‘‘restrictions and requirements’’ on national banks’ real estate 

lending power.

49See 12 C.F.R. §§ 5.34 and 7.4006. See also 69 Fed. Reg. 1905, 1906.

5069 Fed. Reg. 1915 (2004).
Page 38 GAO-06-8 OCC Preemption Rulemaking

declare that this federal standard indeed applied to national banks. OCC 

viewed this as a fitting addition to its rule. OCC also stated that its 

anti-predatory lending standard augments prior standards such as those 

contained in OCC’s Advisory Letters on predatory lending. According to the 

Comptroller, OCC pioneered the use of section 5 as a basis for enforcement 

actions against banks that have engaged in such conduct. In contrast, in 

response to commenters who suggested that OCC specifically articulate 

what activities constitute unfair and deceptive practices, OCC noted in the 

preamble to the final banking activities rule that it does not have authority 

to specify by regulation specific practices as unfair or deceptive under the 

Federal Trade Commission Act. In February 2005, OCC issued new 

guidance pursuant to the enforcement scheme of section 39 of the Federal 

Deposit Insurance Act, “as a further step to protect against national bank 

involvement in predatory, abusive, unfair, or deceptive residential mortgage 

lending practices.”51 This guidance describes practices that OCC deems 

inconsistent with sound residential mortgage lending practices. It also 

describes other terms and practices that may be conducive to predatory, 

abusive, unfair, or deceptive lending practices, depending on the 

circumstances. OCC noted in the guidance that it has the discretion to take 

action to enforce the guidelines. 

In response to comments arguing that the banking activities rule would at 

some point preempt categories of state law that the proposal declared 

would not be preempted, OCC stated that it “refined” some language in the 

final rule and further explained in the preamble the standards to be used in 

determining when preemption would occur and the criteria for when state 

laws would not be preempted. OCC further explained that (1) state statutes 

and standards that federal law makes applicable or incorporates and (2) 

state laws that relate to the daily course of business of national banks and 

their operating subsidiaries, but only incidentally affect the bank’s exercise 

of its federally authorized powers or otherwise are consistent with federal 

law, would not be preempted.52 The latter category includes laws pertaining 

to contracts, rights to collect debts, the acquisition and transfer of property, 

taxation, zoning, crimes, and torts. Additionally, in response to comments 

that OCC solicited on whether it should “occupy the field” of real estate

5170 Fed. Reg. 6329 (2005).

5269 Fed. Reg. 1911-12, 1913.
Page 39 GAO-06-8 OCC Preemption Rulemaking

lending, OCC determined that it would not do so based on comments it 

received pertaining to this issue and prior judicial decisions.53

With respect to its new anti-predatory lending standard, OCC agreed with 

comments that suggested that there are instances where loans are 

legitimately underwritten on the basis of the value of the borrower’s 

collateral and revised the anti-predatory lending standard to clarify that it 

would apply only to consumer loans secured by real estate. OCC 

characterized consumer loans as loans for personal, family, or household 

purposes and stressed that this standard was intended to prevent 

borrowers from being unwittingly placed in a situation where repayment 

would be unlikely without the lender seizing the collateral and that it would 

permit national banks to use a variety of methods to determine a 

borrower’s ability to repay. 

OCC acknowledged supporting comments requesting that it specifically list 

additional categories of state law that these commenters believed should 

be preempted, but chose not to do so. Instead, OCC included language in 

the rule’s preamble asserting that the list of the types of preempted state 

laws enumerated in the rule were not intended to be exhaustive, that it 

would retain the ability to address other types of state laws on a 

case-by-case basis, and make determinations on preemption under 

applicable standards. Further, in a clarification concerning debt collection 

activities, OCC officials explained that it was difficult to establish a 

standard that would capture all of the concerns raised regarding national 

bank debt collection activities. As a result, OCC changed the description of 

this type of non-preempted state law from laws concerning “debt 

collection” to laws affecting a national bank’s “rights to collect debts” 

(making all phrasing consistent with that used in a Supreme Court 

decision). OCC officials told us that they ultimately decided to leave the 

53OCC states in the final version of its banking activities rule that upon further consideration 

(including careful review of comments submitted pertaining to this point) of whether it 

should “occupy the field” of real estate lending, it concluded, as the Supreme Court 

recognized in Hines and reaffirmed in Barnett, that the effect of labeling of this nature is 

largely immaterial in the present circumstances. As a result, OCC declined to adopt the 

suggestion of certain commenters that it declare that the regulations ‘‘occupy the field’’ of 

national banks’ real estate lending, other lending, and deposit-taking activities and chose to 

rely on its authority under both 12 U.S.C. 93a and 371. To the extent that an issue arises 

concerning the application of a state law not specifically addressed in the final regulation, it 

would retain the ability to address those questions through interpretation of the regulation, 

through issuance of orders pursuant to its authority under 12 U.S.C. 371, or, if warranted by 

the significance of the issue, by rulemaking to amend the regulation.
Page 40 GAO-06-8 OCC Preemption Rulemaking

interpretation of this term open to the possibilities of subsequent OCC 

action or interpretation by the courts. 

Stakeholders Raised 

Issues Regarding the 

Process OCC Used to 

Promulgate Its 

Preemption Rules 

Some Members of Congress, state officials, and consumer groups criticized 

how OCC promulgated the banking activities rules. For example, some 

members requested a delay in the finalization of the rules so that they could 

hold additional hearings to discuss the rules’ potential impacts on 

consumer protection. According to OCC officials, they could not determine 

the length of the delay that some members were requesting, and a lengthy 

delay would have created more uncertainty for national banks regarding 

the applicability of state or local laws and could have led some lenders to 

leave certain markets. Moreover, according to OCC, while some members 

sought a delay, other members did not endorse a delay. Additionally, some 

representatives of consumer groups and state organizations criticized OCC 

for not employing additional mechanisms for soliciting public input in the 

rulemaking. Other regulators told us they have used additional mechanisms 

for public comment during rulemakings they deemed controversial. 

Congressional Members 

Requested a Delay in the 

Finalization of the OCC 

Rules 

Some Members of Congress requested that OCC delay finalization of its 

rules so that they could further study its potential impact. However, 

congressional members and staff did receive information on the rules prior 

to this request. According to a chronology provided to us by OCC staff, 

OCC officials briefed a number of congressional members and their staff 

starting in October 2002 and ending in October 2003. In several of these 

briefings, the then-Comptroller of the Currency and OCC’s Chief Counsel 

briefed majority and minority staff from the Committee on Financial 

Services, House of Representatives, and the Senate Committee on Banking, 

Housing, and Urban Affairs. 

Some Members of Congress wanted OCC to delay the finalization of the 

rules so that they could hold hearings on the proposed rules. According to a 

letter from members of the House Financial Services Committee from the 

state of New York to OCC, the focus of the hearings would be the potential 

impact of the rules on consumer protection and the dual banking system. 

The Acting Comptroller of the Currency described that OCC staff received 

mixed views from within Congress and that some members of the House 

Financial Services Committee wanted a hearing while others did not 

endorse a delay or hearing. Since the OCC staff did not receive any 
Page 41 GAO-06-8 OCC Preemption Rulemaking

information on a specific date for the hearing, they were uncertain about 

the length of the delay that the members were requesting. 

In congressional testimony (in late January 2004), the Acting Comptroller 

provided reasons for why the agency finalized the rules when it did.54 First, 

the rules were not creating any “new law” because the rules were entirely 

consistent with existing laws, such as the National Bank Act. Second, the 

continuing uncertainty about the applicability of state laws had affected 

national banks’ ability to lend in certain markets and access the secondary 

market. Third, the Acting Comptroller asserted that state and local 

governments were accelerating enactment of anti-predatory lending 

legislation. 

The Acting Comptroller provided us with a similar explanation, saying that 

OCC was receiving inquiries at the time from national banks requesting a 

clarification on whether state laws on anti-predatory lending would be 

applicable to them and advising OCC that these state laws were creating 

market impacts. A lengthy delay would have resulted in more uncertainty 

for the banks because more states would have continued enacting 

anti-predatory lending laws, which would have adversely affected the U.S. 

mortgage market. Moreover, she noted that a number of state 

anti-predatory lending laws were to come into effect during 2004, and OCC 

anticipated that additional states were planning to enact such laws. OCC 

officials also noted that the former Comptroller of the Currency became ill 

during the final stages of the banking activities and visitorial powers 

rulemaking. Because OCC did not have a date for the potential 

congressional hearing and the Comptroller wanted to take part in the 

finalization of the rules, OCC staff worked to be in a position to complete 

the rulemaking process by late January 2004. 

Some Groups Criticized 

OCC’s Efforts to Solicit 

Public Input 

Consumer and state groups wanted OCC to provide additional mechanisms 

beyond written comments for soliciting public input. Some consumer 

groups told us that OCC should have held “public meeting type” hearings 

and extended the length of the 60-day comment period to obtain public 

54See testimony of Julie L. Williams, First Senior Deputy Comptroller and Chief Counsel, 

Office of the Comptroller of the Currency, Subcommittee on Oversight and Investigations of 

the Committee on Financial Services, U.S. House of Representatives, January 28, 2004. Also 

see testimony of John Hawke Jr., Comptroller of the Currency, Office of the Comptroller of 

the Currency, Committee on Banking, Housing and Urban Affairs, U.S. Senate, April 7, 2004. 
Page 42 GAO-06-8 OCC Preemption Rulemaking

comments on the banking activities rule. In their view, the banking 

activities rule was a controversial proposal that required OCC to obtain 

sufficient input from groups across the country. According to these groups, 

it has been a standard practice at other federal agencies to hold these types 

of meetings when the agencies deem that proposed rules would be 

controversial. Some consumer groups considered that public meetings 

were an important part of an educational, democratic process. 

According to OCC officials, it was not OCC’s standard procedure to hold 

“public meeting type” hearings on proposed rulemakings. The Acting 

Comptroller of the Currency told us that she personally conducts outreach 

to consumer groups and the banking industry on a variety of issues, 

including preemption; also, she did not foresee that she would have heard 

anything different in a public hearing than in her outreach sessions. OCC 

also has staff in the Community Affairs Department and a Banking 

Relations Senior Advisor, who, according to OCC staff, host outreach 

efforts with consumer and banking groups, respectively, on a frequent 

basis. These efforts provide these groups with an opportunity to comment 

on issues. 

Some Federal Regulators 

Have Used Additional 

Mechanisms for Obtaining 

Public Comments on 

Controversial Rulemakings

Based on our interviews with FDIC, Federal Reserve, OTS, and SEC, staff 

employ additional mechanisms for soliciting public input for rulemakings. 

According to its Deputy General Counsel, FDIC will take steps in addition 

to accepting written comments to alleviate some of the controversy 

associated with certain rulemakings. For example, from the mid-1980s to 

2005, FDIC held approximately seven “public meeting type” hearings on its 

rulemakings. The most recent concerned a request from a bank industry 

group that FDIC issue rules that would allow a state bank’s home state laws 

to govern the interstate activities of state banks and their subsidiaries to 

the same extent that the National Bank Act governs a national bank’s 

interstate activities. In announcing the public hearing on March 21, 2005, 

FDIC stated that if it agreed to conduct a rulemaking on preemption, the 

rulemaking proposal would be published in the Federal Register and an 

opportunity for public comment would be provided. On May 24, 2005, FDIC 

held the hearing on the preemption request; participants were an attorney 

representing the Financial Services Roundtable, the CSBS Chairman, five 

state banking regulators, an organization representing community bankers, 

the National Association of Realtors, and representatives from the three 

community groups and four banks. After each panel presented its views, 

FDIC staff asked questions of the panelists regarding the merits of the 

request and discussed issues with them. Additional parties chose not to 
Page 43 GAO-06-8 OCC Preemption Rulemaking

appear at the hearing, but submitted written views on the petition. On July 

19, 2005, in a meeting open to the public, the FDIC Board voted to table the 

preemption request from the bank industry trade group but directed its 

staff to develop a more thorough notice of proposed rulemaking on the 

issue. 

OTS has rarely held “public meeting type” hearings on proposed 

rulemaking proceedings, but according to OTS officials, OTS has held what 

the officials called “town meetings” on a regular basis at its field offices and 

has used them as an opportunity to identify emerging issues. Similar to 

OCC, OTS will forward advance copies of rulemaking proposals that may 

have federalism implications under E.O. 13132 to CSBS officials about 1 

week before the proposal is published in the Federal Register. But, on 

occasion, OTS will contact other organizations representing state officials 

and regulators, including the National Association of Attorneys General 

and the American Association of Residential Mortgage Regulators, for 

input on OTS’s rulemaking proposals. OTS officials told us that they may 

meet occasionally with groups during the public comment stage of a 

rulemaking, but if they did, then staff would include a transcript of the 

discussion in the rulemaking file. 

Federal Reserve policy provides that the usual method for the public to 

provide input on a rulemaking is through written comments. According to 

Federal Reserve staff, the Federal Reserve has not held a formal “public 

meeting type” hearing for a rulemaking in the last 5 years. However, 

according to Federal Reserve staff, the agency often conducts a substantial 

amount of outreach activity with interested parties before the rulemaking 

process starts or a proposal is published in the Federal Register. Even after 

a rulemaking has commenced, Federal Reserve officials or staff may hold 

meetings with interested parties. According to Federal Reserve staff, 

written summaries of these meetings typically are prepared and placed on 

the Federal Reserve Web site and in the public comment file for the 

particular rulemaking. Although OCC officials told us that they held 

outreach meetings, they did not document the meetings and submit 

summaries to the public comment file or document outreach meetings with 

consumer groups. In addition, the Federal Reserve has considered ideas for 

consumer regulations from participants who have made presentations to 

the Consumer Advisory Council and have brought the topics of possible or
Page 44 GAO-06-8 OCC Preemption Rulemaking

ongoing rulemakings before the Consumer Advisory Council to obtain the 

views of council members.55 

SEC has held special public meetings, such as roundtables, to solicit 

additional input from outside parties. According to SEC staff, the agency 

uses the meetings to allow commenters to elaborate on their comments 

and discuss their comments with others. SEC staff told us that special 

public meetings have been held for rule proposals that raise particular 

public interest or are technically complex. 

Finally, in contrast to OCC, all of the regulators place the comments they 

receive on their proposed rulemaking on their Web sites. Posting the 

comments on the Internet allows organizations and individuals who are 

planning to submit comments to read the comments already received by 

the agencies. The objective of the governmentwide E-Gov rulemaking 

initiative pilot is to require federal agencies to place public comments on a 

centralized Web site to make them easily accessible to the public, and OCC 

concluded that it would be inefficient to devote resources to establish a 

public comment posting system that would quickly be rendered obsolete by 

the E-Gov centralized system. 

Observations The preemption of state law relating to the business of banking has long 

been a controversial issue. It seems to have become more so with 

consolidation in the financial services industry, which has resulted in large 

national banks’ presence in virtually every state in the country. As the 

regulator of national banks—including some of the nation’s largest—OCC’s 

decisions can be far reaching. OCC can help mitigate some of the 

controversy that inevitably will ensue from its preemption decisions by 

ensuring that its proposals are thoroughly aired with all relevant 

stakeholders.

In OCC’s recent preemption rulemakings, controversy focused both on the 

agency’s legal analysis justifying preemption and on the possible effects of 

its rules on state-chartered banks and consumers. Federal law and 

55The Federal Reserve’s Consumer Advisory Council comprises academics, state and local 

government officials, representatives of the financial industry, and representatives of 

consumer and community interests. It was established pursuant to the 1976 amendment to 

the Equal Credit Opportunity Act to advise the Federal Reserve on consumer financial 

services. 
Page 45 GAO-06-8 OCC Preemption Rulemaking

executive orders requiring agency accountability and stakeholder 

involvement drove public input on these matters. Following requirements 

in the APA and 12 U.S.C. § 43, OCC provided public notice of the proposed 

rules and sought public comment. The agency extended the opportunity for 

public comment to 60 days rather than the more typical 30 days, and it 

considered all of the comments and made changes it deemed appropriate. 

With respect to agency rulemakings that preempt state law, the 

“Federalism” executive order calls for an “accountable process to ensure 

meaningful and timely input by state and local officials” and, because of the 

possibility of a conflict between state law and federal interests, requires 

agencies to “consult, to the extent practicable and permitted by law, with 

appropriate state and local officials in an effort to avoid such a conflict.” 

Beyond the consideration of comments required by statute, OCC arranged 

for formal meetings with CSBS and followed the consultative process set 

forth in the letters exchanged by OCC and CSBS in 1999. In the face of an 

executive order specifically calling for state and local consultation on 

preemption rules, OCC’s limited additional effort may have contributed to 

an impression that it did not genuinely seek or consider input from this 

community. Stakeholders representing such diverse interests as consumer 

protection advocates, state bank regulators, state attorneys general, and 

some Members of Congress continue to maintain that the agency did not 

genuinely seek their input.

Executive Order 13132, entitled “Federalism,” affords agencies flexibility in 

determining precisely how much input is appropriate in any given 

circumstance, and we do not assert that OCC did not follow these 

requirements. As a practical matter, however, the agency’s own interests in 

developing workable regulations and in reaching acceptable resolutions 

might have been better served in this case by providing more opportunity 

for discussion by those most directly affected. We note that even where 

preemption was not an issue, other federal financial institution regulators 

took additional actions, such as holding public meetings, to ensure wider 

involvement in the public review and comment on proposed regulations 

they deemed controversial.

Finally, OCC’s rulemaking process would benefit from better 

documentation—both written guidance for the process itself and more 

thorough documentation that the process is followed in specific 

rulemakings. Other financial institution regulators use written procedures 

that provide a framework for ensuring their compliance with applicable 

requirements. Such procedures can help agency officials ensure that 

appropriate criteria for rulemaking—whether in the APA, other laws, or 
Page 46 GAO-06-8 OCC Preemption Rulemaking

executive orders—are followed and documented. We were able to 

determine the process OCC followed for the preemption rulemakings only 

by pulling together information from multiple sources, including the 

rulemaking dockets, other OCC documents, and officials and stakeholders 

we interviewed. OCC’s rulemaking files alone did not contain much of this 

information—the files omitted details on both the fact and substance of 

OCC communications with key stakeholders. Given the controversial 

circumstances surrounding these rulemakings, it might have been in the 

agency’s best interest to have created better documentation of its actions 

and decisions. Moreover, federal internal control standards stress the 

importance of such documentation for verifying that management 

directives and guidance have been carried out and that the agency has 

complied with applicable laws and regulations. Without documentation 

about matters such as how decisions were reached, who was consulted, 

and what their views were, we were not able to present information in this 

report that might have contributed to a better understanding of OCC’s 

process. 

Agency Comments and 

Our Evaluation

We provided a draft of this report to OCC for review and comment. In 

written comments, the Comptroller of the Currency (see app. II) concurred 

with our observation that its rulemaking process could benefit from more 

detailed written rulemaking procedures. OCC has begun a project to 

develop such procedures and expects to complete them by the end of 2005. 

OCC expressed concerns about the draft report’s observation that staff 

memorandums in OCC’s rulemaking files did not articulate the analysis 

underlying OCC’s conclusion that the rules were not “significant” for 

purposes of E.O. 12866. OCC commented that the files contained seven 

memorandums prepared by OCC’s legal and economic policy staff 

describing their analysis and conclusions under E.O. 12866. OCC believes 

the agency satisfied the requirements of the executive order. During our 

review, we examined the staff memorandums for both the visitorial powers 

and the banking activities rules. However, the analyses in the 

memorandums consisted of stating that the rule was not a “significant 

regulatory action,” as defined by E.O. 12866 because the annual effect on 

the economy was less than $100 million and did not address the other 

criteria set forth in the order for determining whether an action is
Page 47 GAO-06-8 OCC Preemption Rulemaking

 significant.56 The memorandums did not include or refer to any analysis to 

support the conclusion stated. Thus, we continue to maintain that OCC’s 

documentation did not articulate the analysis underlying its conclusion that 

the rules were not “significant” for purposes of E.O. 12866. 

Finally, although OCC disagreed with the draft report’s observation that the 

extent of OCC’s consultation with state officials appeared limited, it 

intends to make improvements in this area. In OCC’s view, its consultation 

with state officials complied with the “Federalism” executive order and 

was appropriate in view of the nature of the preemption rulemakings. 

However, OCC stated that it is committed to enhancing its efforts in 

“continuous, open and candid dialogue” with state and federal regulators 

on issues such as assuring consumer protection. The Comptroller stated 

that he had already had several meetings to further this goal. OCC also 

provided technical comments that we incorporated, as appropriate.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution of this report until 30 

days from the report date. At that time, we will provide copies of this report 

to the Comptroller of the Currency and interested congressional 

committees. We also will make copies available to others upon request. In 

addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-8678 or hillmanr@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. Key contributors are acknowledged in appendix III. 

Richard J. Hillman 

Managing Director, Financial Markets and 

 Community Investment

56In addition to the $100 million measure, the order sets forth other criteria for determining 

whether a rule is significant. These include whether a rule would have an adverse affect in a 

material way on state, local, and tribal governments or communities. 
Page 48 GAO-06-8 OCC Preemption Rulemaking

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

The Office of the Comptroller of the Currency (OCC) recently issued two 

final rules to clarify the applicability of state law to certain national bank 

operations, commonly known as the bank activities or “preemption” rule 

and OCC’s authority to examine, supervise, and regulate activities 

authorized for federally chartered or national banks under federal law, 

known as the “visitorial powers” rule. The proposed rules and OCC’s 

rulemaking process drew strong reactions of either support or opposition 

from the banking industry, state officials, consumer group representatives, 

and some Members of Congress. In our report, we (1) assess OCC’s 

rulemaking process within the framework of applicable laws and executive 

orders, (2) determine the issues raised in the comment letters on the 

substance of the preemption rule and describe if and how the OCC 

responded to these issues, and (3) identify issues stakeholders raised about 

the process OCC used to promulgate both the banking activities and the 

visitorial powers rules and determine OCC’s response.

To assess OCC’s rulemaking process within the framework of applicable 

laws and executive orders, we focused on the process OCC used to 

promulgate its rules on banking activities and visitorial powers. We 

reviewed the laws and executive orders relevant to the two rules: section 

553 of the Administrative Procedure Act, the Regulatory Flexibility Act, the 

Congressional Review Act, Executive Order 12866 on Regulatory Review, 

and Executive Order 13132, “Federalism.” To determine OCC actions in 

conducting its rulemaking, we interviewed officials from OCC’s Legislative 

and Regulatory Activities Division who were responsible for the initial 

drafting of the banking activities and visitorial powers proposals and final 

rules. In addition, we reviewed OCC’s internal files for both rulemakings, 

including materials from the dockets.1

 The documents we reviewed 

included correspondence between OCC officials discussing the status of 

the rules, staff memorandums sent to the Chief Counsel and the 

Comptroller of the Currency, OCC’s written communications to staff from 

the Office of Management and Budget (OMB) and the Department of 

Treasury (Treasury), and a list of the public commenters for both 

rulemakings. Using information from OCC files and the proposed rule in 

the Federal Register, we compared OCC’s actions related to the 

rulemakings with the provisions we identified in relevant laws and 

executive orders. We interviewed officials from OMB’s Office of 

1

Public comments as well as other supporting materials (e.g., hearing records or agency 

regulatory studies but generally not internal memorandums) are placed in a rulemaking 

“docket,” which must be available for public inspection. 
Appendix I

Objectives, Scope, and Methodology 

Page 49 GAO-06-8 OCC Preemption Rulemaking

Information and Regulatory Affairs and Treasury’s Office of General 

Counsel. In addition, we interviewed staff from other federal financial 

regulatory organizations (the Federal Deposit Insurance Corporation, the 

Board of Governors of the Federal Reserve System, the Office of Thrift 

Supervision, and the Securities and Exchange Commission) to obtain 

information on their rulemaking processes. 

To identify the issues raised in comment letters concerning the banking 

activities rule, we conducted a content analysis of 373 comment letters 

received by OCC on its bank activities preemption proposal.2

 While OCC 

received 2,706 comment letters, we identified 2,250 as form letters, most of 

which expressed identical concerns about financial subsidiaries of national 

banks possibly conducting real estate brokerage activities without 

complying with state real estate brokerage licensing laws.3

 However, 

financial subsidiaries currently are not allowed to conduct real estate 

brokerage activities, and OCC concluded that these letters were not 

relevant to its review of the public comments because the bank activities 

preemption proposal did not apply to financial subsidiaries of national 

banks.4

 Therefore, we decided it was not appropriate to include these form 

letters in our content analysis for identifying issues related to the banking 

activities rulemaking. Additionally, we identified 83 duplicate letters (more 

specifically, copies of letters received in more than one medium, such as 

fax, mail and e-mail), which we also excluded from our content analysis.

To analyze the comments, we first separating the letters into three 

categories: letters that supported the banking activities ruling (37), letters 

that opposed the ruling (316), and letters that neither supported nor 

opposed the ruling (20)—that is, the commenters requested clarification of 

certain parts of the proposal. We then randomly selected and reviewed a 

“developmental” set of letters from each category and established an initial 

set of codes that would further characterize comments within each 

category. We applied these codes to a test set of letters and made 

refinements. We then applied the refined codes to a second test set of 

2

Our analysis focused on comments submitted in response to OCC’s bank activities 

proposal. 

3

Most of the public comments were from Realtors.

4

The Board of Governors of the Federal Reserve System and the Department of the Treasury 

are considering a proposal to permit financial subsidiaries to do this activity, but have not 

finalized any proposal as of the date of this report.
Appendix I

Objectives, Scope, and Methodology 

Page 50 GAO-06-8 OCC Preemption Rulemaking

letters, made more adjustments, and established the final codes for each 

category of letter. We distributed letters from each category among three 

pairs of trained coders, who independently coded their set of letters and 

resolved discrepancies to 100 percent agreement. The coders regularly 

performed reliability checks throughout the coding process. To further 

ensure consistency across coding pairs, one reporting team member met 

regularly with each coding pair while they performed their reliability 

checks to help resolve any conflicts across the pairs. The coders recorded 

their results on a standardized data collection instrument, and one coder 

from each pair entered the results into an electronic data file, and 100 

percent of the entered data was verified for accuracy. Descriptive statistics 

for the codes were computed using SAS statistical software. A second 

independent analyst reviewed the data analysis.

To determine the extent to which OCC considered and addressed the 

comments, we identified any changes between OCC’s proposed and final 

version of the rule. We analyzed the preamble to the final rule in which 

OCC acknowledged the public comments it received and discussed its 

responses. We then identified the rule changes that OCC attributed to 

public comments and the public comments OCC acknowledged it did not 

address. We verified our analysis with OCC officials from the Division of 

Legislative and Regulatory Activities. In addition, we reviewed OCC’s 

internal memorandums on the banking activities rule to identify OCC’s 

views on the issues arising from the public comments and its assessment of 

the comments. 

To identify issues stakeholders raised about the process OCC used to 

promulgate the banking activities rule and the visitorial powers rule, we 

identified and interviewed interested parties that may be impacted by the 

banking activities and visitorial powers rules. We interviewed 

representatives of organizations of state officials (Conference of State 

Bank Supervisors, National Association of Attorneys General, National 

Governors Association, and National Conference of State Legislatures). In 

addition, we interviewed officials from consumer organizations (Center for 

Responsible Lending, Consumer Federation of America, National 

Community Reinvestment Coalition, and National Consumer Law Center). 

We also analyzed correspondence from congressional members to OCC 

that questioned OCC’s rulemaking process and congressional hearing 

transcripts and testimonies. To obtain information on OCC’s response to 

the criticisms regarding its rulemaking process, we interviewed the Acting 

Comptroller of the Currency and officials from OCC’s Division of 

Legislative and Regulatory Activities. Finally, we interviewed staff from the 
Appendix I

Objectives, Scope, and Methodology 

Page 51 GAO-06-8 OCC Preemption Rulemaking

Board of Governors of the Federal Reserve System, Federal Deposit 

Insurance Corporation, Office of Thrift Supervision, and Securities and 

Exchange Commission on additional mechanisms that they used to solicit 

public comments in connection with informal rulemakings they considered 

controversial. 
Page 52 GAO-06-8 OCC Preemption Rulemaking

Appendix II

Comments from the Office of the Comptroller 

of the Currency ApendxiI
Appendix II

Comments from the Office of the Comptroller 

of the Currency

Page 53 GAO-06-8 OCC Preemption Rulemaking
Appendix II

Comments from the Office of the Comptroller 

of the Currency

Page 54 GAO-06-8 OCC Preemption Rulemaking
Page 55 GAO-06-8 OCC Preemption Rulemaking

Appendix III

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Richard J. Hillman, (202) 512-8678

Staff 

Acknowledgments

In addition to the individual named above, Katie Harris (Assistant 

Director), Julianne Stephens Dieterich, Nancy Eibeck, Jamila Jones, 

Landis Lindsey, Alison Martin, Kristeen McLain, Marc Molino, Barbara 

Roesmann, Paul Thompson, and Mijo Vodopic made key contributions to 

this report.

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